Tech hopes turn to horror
JON OGDEN
Do you remember the excited voices from a year ago as the mania for investing in technology reached its zenith?
One particular comment from a fund manager comes to mind. "At this stage, anyone who looks at the price-earnings ratio of a stock ... is an idiot," said Richard Whittall, who then worked for JF Funds.
Now the "idiots" are making a comeback and taking over the asylum known as the Nasdaq stock market. Investors are finally demanding that companies show them the earnings money.
Mr Whittall, now a London-based hedge-fund manager, could be forgiven for making brash comments a year ago. He had just been crowned fund manager of the year for Japan with his Pacific Technology Fund gaining a staggering 441.1 per cent in 1999.
Investors soon found out that what goes up too much must come down. The fund plunged 57.9 per cent last year as Asia worked out most of the excesses of the technology craze, sending stock prices and PEs back to reasonable - even ridiculously cheap - levels.
South Korean memory-chip maker Samsung Electronics trades on only 4.86 times its expected earnings for last year, while contract chip foundry Taiwan Semiconductor Manufacturing is on 15 times last year's expected earnings.
The real problem for world markets is Wall Street, which has still not fully awoken from its technology and New Economy dream.
The technology-laden Nasdaq Composite Index is down 62 per cent from its historic high on March 10 last year.
Taking a look at some other numbers, however, shows the fat lady has still to exercise her vocal chords.
Sadly, that means that although Asia has served its penance for too many technology cream cakes, it is going to get more punishment as global benchmark Nasdaq belatedly comes to its senses.
The process is still far from complete if a closer look is taken at some stocks.
After the bashing the Nasdaq has taken, Juniper Networks might look cheap for a sexy Internet infrastructure-maker by trading on 47 times this year's expected earnings.
Analysts certainly think so. Every house surveyed by data provider Thomson Financial I/B/E/S has a "strong buy" on the stock.
But take another look.
The PE ratio only looks relatively cheap because the consensus of analysts' estimates is for 136 per cent growth in earnings this year.
Is that likely for a company operating in the United States - an economy likely to see economic growth nosedive from 5 per cent last year to 1.4 per cent this year, according to JP Morgan?
Is that the kind of earnings growth likely with the flame out of the dotcom sector and financially pressured US telecommunications companies slashing capital spending?
Just suppose that amid all the problems, Juniper only manages to produce earnings matching last year's. Then it is trading on a stratospheric 112 times earnings.
These days, when sane valuations are back in fashion, that means Juniper is riding for a fall.
And no wonder that investors are heading for the exits on Nasdaq. They have woken up and smelled the coffee. They realised that the sums from Wall Street analysts just don't add up.
Juniper's rival Cisco Systems, a model for growth and precision in its financial projections, had expected earnings to increase 19 per cent in its financial year to July.
But on Friday it said it was slashing up to 5,000 jobs, or 10 per cent of its workforce, amid a global slowdown in demand for Internet routers and could not foresee what its revenues would be like for the next few quarters.
If anything though, price-earnings ratios are going up because the prospects for profits are decaying faster than analysts are cutting their forecasts.
"My feeling, if anything, is that valuations have gone higher because earnings have collapsed," said maverick investment adviser Marc Faber.
"At this level, the Nasdaq is still not cheap. In general, the valuations don't seem attractive."
Mr Faber, widely known as Dr Doom, last year predicted the Nasdaq could go as low as 1,000 points, a target he is sticking to.
Even outside the tech sector, analysts have been slow to catch up to the reality that the US economy is flat at the very best.
Financial giant Citigroup is expected to grow earnings 11.22 per cent for the year to December 31, according to a consensus of analysts' forecasts calculated by Thomson Financial.
Investment bank Merrill Lynch is expected to see 4 per cent growth, even though the lucrative market for new share offerings in the US has clanged firmly shut in its face and brokerage commissions are sure to fall in a raging bear market.
Cynics contend that analysts have been reluctant to cut earnings growth estimates and put sell recommendations on stocks because that would foul up prospects for the brokerage to pick up lucrative investment banking business with the firm concerned.
They also fear removing the sugar coating from their research could spook the markets.
Mary Meeker, Morgan Stanley's well-known Internet analyst, said she hesitated to downgrade many of the stocks she covered for fear of the fallout among investors.
After being suckered for months by Wall Street with rosy research amid the downturn, investors have finally had enough. Last month, there was a net outflow from US mutual funds for the first time in three years, according to Mr Faber.
Implicit in analysts' expectations for profit growth this year has been a recovery in the second half engineered by US Federal Reserve chairman Alan Greenspan. The trouble is no one can say for certain that will come off and investors have decided not to stick around to find out. Better to sell and buy back when the recovery is actually in evidence, they figure.
"There has been a fundamental change. People previously envisaged a V-shaped recovery," said John Mytton, a regional fund manager with Global Asset Management.
But even with savvy companies like Cisco unable to see any light at the end of the tunnel, "investors are running scared", Mr Mytton said.
Financial television channel CNBC is a good gauge of the mood of the market. Last year, its anchors played cheerleader, urging investors to get knee-deep in highly priced tech stocks.
Now they are busy pointing fingers at analysts to find who is to blame for the mess.
Meanwhile, poor old Asia - which was just crawling out of the shell crater of the Asian crisis - has copped it sweet once more. And though Asian stocks are cheap, they will probably get cheaper still as the region continues to track Wall Street lower.
"It doesn't appear at the moment as if we will be able to decouple," Mr Mytton said.
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