Rande,
Even though this is a Short Term thread, you have taught me to step back and look at the forest once in awhile.
(By the way, there are always short term opportunities that abound even when a sector is going down - a little foreshadowing of my note here:)
In the past two years we have seen an extreme "re-evaluation" of stocks in a few key sectors. On a broad sense, I am referring to Telecom companies, PC maker companies, Extremely High Cap Tech Companies (MSFT, INTC, CSCO), Wireless phones/services, Internet Companies (B2C, B2B, Online brokerage, ISP) and to a lesser extent semi-conductors. Now, we are on the "possible" brink of a "re-evaluation" of the broadband sector, IMO. Seems like it is not going to happen, because you and I know that these companies make real products that sell as fast as they make them, and most of these companies are actually making money.
What is different in the latest crushing of the fiber optic companies than that of the crushing of the internet companies the past two springs?
1) Most of the internet companies were not making money - the obvious answer.
What is similar?
1) Rate of growth (the delta of the delta) of the fiber optic companies is being questioned.
2) Profit or not, valuations are extremely high. The companies that we love (amcc, pmcs, lpth) have valuations that when looked at historically are ridiculous.
I think we need to consider the psychology of the investor in a broader sense than capitulation. For example, an investor two or three years ago may not have invested in a company with a 1000 PE, but after watching these companies continue to grow, he/she decided to "play the market" either by purchasing individual securities or high risk mutual funds. Now that the investor sees the market "re-evaluate" stocks sector by sector, he/she decides to take some of the profit from overvalued investments and place it into safer sectors. This is only one example of how sentiment may be changing - the amount of risk one is willing to take is relative to the perceived risk reward ratio. The reward is becoming less and the risk is becoming more. A fatal combination!
Investors are starting to ask "Why value a stock 7 years down the road?" The investor knows that there could be an international crisis, an increase in inflation, a decrease in economic strength, or a natural disaster that could send the market tumbling and specifically crush the companies that are valued extremely high.
Have I become a bear - I fear to admit it, but I have become a selective bear. What do I mean by a "selective bear?"
Think about it this way. In about 7 years, there will be more individuals who are in there "later" years than there will be in their working/spending prime years. The companies that will continue explosive growth are the ones that can cater to the future population shift. Real estate in the suburbs will be less expensive as more retirees are moving out than yuppies are moving in, but real estate in other areas will explode with the increase of retirees moving into them.
I do not have statistical information, but by all anecdotal information, there is more money invested in securities today than ever before. Could this be the reason valuations are generally higher than before? That may affect valuation averages, but overall the effect of increased money flow cannot justify some of the extreme valuations given to many companies today.
Where will the money go as the working force strives to protect profits and grow a sturdy retirement account? Eventually, I believe financial services, certain real estate opportunities, health related fields, data storage, communication and transportation will benefit the most from the future population shift.
In the meantime, technology is becoming a commodity and we do not want to face that fact. (But there will be some winners - as Rande so often says, only the best companies will rise to the top.)
Right now, I will stray away from selecting a winning sector for the next year; there are many options - communications semiconductors, fiber optics, data storage, and alternate energy sources. But again, these are the companies that are valued so high - yes, they will grow the fastest, but does that growth justify their valuations.
I still intend to trade short term, but I think we need to revisit that long term discussion that we had once before Rande. I will be seriously considering altering my strategy with the next 10 years in mind.
Finally, if you're still with me, I cannot stress enough the effect that the "change" (decrease) of growth projections (even if it is from 100% revenue growth to 95% revenue growth) will alter the way the entire market perceives a sector. Remember, that decrease is only the first DECREASE in rate of growth that will occur - there will be more downward adjustments in each company's situation. A company cannot continue to grow at 100% growth throughout the years. As these growth rates come down, stock prices will decrease exponentially.
I welcome all thoughts. We are all learning and growing, and although we focus on short term it is difficult to succeed without understanding where the market is going in the long term.
Paullie |
