Pro Forum: Peter Canelo, Investing Strategist
Friday March 9, 7:01 am Eastern Time
Forbes.com
By Mark Lewis
<<One year ago today, the Nasdaq Composite passed the psychologically important 5,000 mark for the first time. The next day the index hit its high-water mark, 5,048.62, having doubled in only a year. It's been downhill ever since. The index is definitely in bear-market territory, off more than 50% from its high. Is the worst over?
Peter Canelo, U.S. investment strategist for Morgan Stanley Dean Witter, says yes. He thinks the tech-heavy Nasdaq is bottoming out. The technology sector is primed for a recovery, says Canelo, who predicts that the Nasdaq index will be comfortably above 3,000 within 12 months.
Forbes.com: The tech sector rebounded in January, then collapsed again last month. What's going on?
Canelo: I think the real problem recently has been the high-flyers--Oracle (Nasdaq: ORCL - news), Sun Microsystems (Nasdaq: SUNW - news), EMC (NYSE: EMC - news), Cisco (Nasdaq: CSCO - news), Nortel (NYSE: NT - news) and Intel (Nasdaq: INTC - news). Just those six stocks were half of the decline of tech in February. Unfortunately, the big high-flyers have the biggest capitalization, and they have driven down the averages in the S&P 500 and the Nasdaq. Elsewhere in technology, we're seeing bottoming in the hardware stocks, most of the software stocks, computer services and most of the semiconductors and the semiconductor equipments. And that's an area where we've seen a bottoming in earnings revisions. Same thing was happening with telecom. Earnings revisions bottomed in early December, and the entire telecom sector seems to have bottomed in mid-December.
Have price-to-earnings ratios fallen back to reasonable levels?
Among the 100 largest technology companies that we track, the group P/E [price/earnings ratio] has come down to 30. That in our view is reasonable, considering that you've got better than 20% growth rates in that sector. In fact, this is the lowest P/E for technology that we've seen since October 1998. And that was a good time to buy technology. It was a good time to buy the market, especially once the Fed had cut rates three times. And we think that [a third rate cut by the Federal Reserve] will be in place by the end of this month.
Can the Nasdaq still go lower?
Sure it can go lower, but I don't think it can go much lower because you've already got some very good values. And I think the earnings estimates are now much more reasonable. I think six months ago, analysts were looking for a 25% rise in technology profits this year. Now they're looking for a 10% decline. That is an enormous change in six months. I've never seen anything like that.
What was behind the big tech boom in 1999-2000?
There are three forces that boosted profits in technology tremendously. One was a normal PC replacement cycle, which happens roughly every four years. This one was the Pentium 2, Pentium 3, Windows 2000 replacement cycle. And this time, the replacement cycle was augmented by Y2K. People bought computers before Y2K just to make sure they were going to work, and then after Y2K, any projects that had been put on the shelf came back on stream. So there was this enormous resumption of pent-up demand, which helped push tech profits up 40-50% in early 2000.
That's two forces boosting tech profits. What was the third?
We had a fortuitous coordination of the global economy along with the American economy. Because of the Asian crisis in '98, everybody had pushed interest rates down. Predictably, about a year, year-and-a-half later, the economy will do well. So just when the American economy was hitting full stride, the global economy was hitting full stride.
What about all those new dot-coms that were stocking up on information technology systems in 2000? Did that have a big impact on tech profits?
That was a fourth factor, although I don't think it was as important as many people believe. The capital expenditures of all the dot-coms last year did not exceed 1% of the capital expenditures of the S&P 500 companies. But it also contributed. So there were three or four factors that took tech profits to an unusually high level.
What finally brought expectations back in line with reality?
By October, the companies were horrified that analysts expected that kind of boom to continue. It wouldn't, of course--it was a temporary thing. And, universally, the companies told the analysts that this isn't going to last; we're going to see revenue growth cut almost in half in 2001. And thus began the process of crashing down the earnings from up 25% to minus 10%.
So where does the Nasdaq go from here?
I think within the next 12 months we can probably get back up to the 3,300 to 3,500 area on the Nasdaq. I don't know that we'll make 3,000 by year's end, but there's a good chance that we could. I think a lot depends on how aggressively the Fed moves. If the Fed does move aggressively, the slowdown in the economy will be contained. And we're likely to get a tax cut; and if it is retroactive, then I think the market would be especially buoyant.>> |
