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When Goldman Quits on Tech, Can Capitulation Be Far Behind?
By Adam Lashinsky
Silicon Valley Columnist
Originally posted at 10:02 AM ET 2/28/01 on RealMoney.com
In assessing an extraordinarily negative conference call Tuesday morning, hosted by technology research analysts at Goldman Sachs, James J. Cramer astutely observed what wasn't said. To wit, with precisely one exception (growing software maker Siebel Systems (SEBL:Nasdaq - news)), group leaders Richard Sherlund and Laura Conigliaro made no contributions to a list of "clean-as-a whistle" companies in whose estimates Goldman remains confident.
Because software analyst Sherlund and hardware analyst Conigliaro cover many of the biggest and most important companies in techland, Cramer correctly points out that their silence was deafening regarding stalwarts such as Microsoft (MSFT:Nasdaq - news), Oracle (ORCL:Nasdaq - news), Sun Microsystems (SUNW:Nasdaq - news) and Hewlett-Packard (HWP:NYSE - news).
Sherlund and Conigliaro had plenty to say, however. They gave a down-in-the-mouth view of their own universe and, importantly, a window on how badly their group had missed the downdraft that leaves them with so little to recommend today. Could this be the sign of the bottom?
Conigliaro notes that tech stocks may well be near a bottom but it'd be too soon to make that judgment. Why? Because there are plenty of further revisions to come. The downturn "has spread to virtually all parts of technology," says Conigliaro, "and even though there are some unaffected companies, there's plenty of skepticism about these, too."
Those unaffected companies include Goldman's list of recommended firms "that have not yet shown signs of being affected by an economic slowing in their income statements and balance sheets." The Nasdaq-listed picks, in addition to Siebel, include: BEA Systems (BEAS:Nasdaq - news), Checkpoint Software (CHKP:Nasdaq - news), Comverse Technology (CMVT:Nasdaq - news), Concord EFS (CEFT:Nasdaq - news), eBay (EBAY:Nasdaq - news), Micromuse (MUSE:Nasdaq - news), NDS (NNDS:Nasdaq - news), Paychex (PAYX:Nasdaq - news), Synopsis (SNPS:Nasdaq - news) and Veritas Software (VRTS:Nasdaq - news).
"The clean-as-a-whistle list is getting smaller," says Conigliaro, who goes on to make what once might have seemed a shocking acknowledgement: "We hoped that this list was entirely objective. Unfortunately, there's always some level of subjectivity. So keep that in mind." Could she be referring to the fact that the clean-as-a-whistle list is heavy with Goldman investment banking clients?
Sherlund is equally blunt in assessing Goldman's role in helping clients figure out which way the wind is blowing. Sell-side analysts, he quips, are often even later to realize problems at the companies they cover than the companies themselves. And that's late. "Directionally, we know the numbers have to come down (further)," says Sherlund of a huge list of downward revisions he and his colleagues made Tuesday. "Our revisions are attempting to reflect more conservatism."
Particularly useless on this call was analyst Anthony Noto, long a defender of Goldman clients Webvan (WBVN:Nasdaq - news) and eToys (ETYS:Nasdaq - news) (neither of which was mentioned Tuesday morning, despite the imminent Chapter 11 bankruptcy filing of the defunct toy retailer). "We do not believe there is an additional risk of a decline in dot-com spending," says Noto, implying that Sun, EMC (EMC:NYSE - news) and Exodus Communications (EXDS:Nasdaq - news) have little to fear now that nearly all the companies Noto follows are almost out of business.
Another member of the late-to-the-game team was communications chip analyst Nathaniel Cohn, who noted for investors that "there really is no place left to hide" in the telecom-related chip business because "visibility is limited." Cohn lowered his estimates Tuesday on a handful of the companies he covers.
A good example was PMC-Sierra (PMCS:Nasdaq - news), the chipmaker that told investors earlier in the year its visibility for the first half of the year was nearly nil. Cohn lowered his 2001 earnings forecast from $1.01 per share to 70 cents. That puts him in line with competitors who lowered their estimates last week -- when the stock was worth nearly $45. The stock closed Tuesday at $37.94.
Even Sherlund notes the near futility of the moment by pointing out that Goldman attempted to lower its across-the-board estimates on Dec. 18. Now it's likely estimates will come down even further for the shaky companies as well as the good ones. "Let's not be naive," he says. "Everyone's going to see strain the longer the economy stays weak."
Is there a silver lining here? Sure. Tech truly is becoming a four-letter-word when Goldman holds its nose and still offers precious little hope. In other words, the bottom could be near when the cheerleaders give up. "They've been cutting numbers religiously," says fund manager Scott Turkel of TCM Partners in Rowayton, Conn., who tuned into the call to see if Goldman strategist Abby Cohen planned to lower her recommended weighting for tech stocks. (She did not). "This is the first time they've done the macro thing."
Sherlund made a particularly helpful suggestion, that we hadn't seen "the point of capitulation yet where companies report bad news and the stocks take it well." Actually, that sort of thing did happen in January, leading some to fall for the sucker's rally that ensued. Perhaps the point to watch for is when Goldman gets around to its next wave of reductions -- and the stocks rally. |
