Telecom's Turn Is Coming
By James B. Stewart
May 22, 2001
yahoo.smartmoney.com
THE FEDERAL RESERVE stepped in last week with another half-point rate cut, hinting at more to come — and, oddly, the stock market waited a day to celebrate. That may be because the celebration wasn't really about the Fed, whose move was already widely anticipated and discounted in stock prices, but in incremental signs that the Fed cuts are working in the broader economy.
In this respect, the signal event wasn't the Fed cut, but WorldCom's (WCOM) $11.9 billion refinancing a week earlier, the largest corporate bond issue in history. In one fell swoop, WorldCom went from a debt-bloated also-ran to a lean competitor, suddenly in position, if it wishes, to increase capital spending. In less spectacular fashion, many other debt-beleaguered companies, including AT&T (T) and Verizon Communications (VZ), have been doing the same. This is all thanks to a Fed that has slashed short-term corporate borrowing costs to the lowest levels in years.
Why is this so important to the market as a whole? Because overspending by the telecom carriers, followed by the unexpected decline of their conventional corporate and consumer voice-transmission businesses, left their credit ratings imperiled, their futures uncertain and their capital spending almost nonexistent. In short order their plight rippled through the telecom food chain, dragging down suppliers like Nortel Networks (NT), Lucent Technologies (LU), JDS Uniphase (JDSU), Corning (GLW) and Cisco Systems (CSCO).
Recall, too, that the plunge of the telecom-equipment sector, which was at its most precipitous during the first three months of this year, came near the end of the Nasdaq implosion and long after the Old Economy stalwarts started sinking nearly two years ago. The bursting of the dot-com bubble came in April; the collapse in PC sales and chip demand in September, and then the plunge of the Internet infrastructure stocks toward the end of the year.
Despite the number of pundits claiming that the Fed has lost its power to influence the economy, all those underlying causes of the recent stock-market decline are now in a process of correcting themselves, largely thanks to lower borrowing costs. And by and large, they are doing so in the same order that they occurred.
The Old Economy stocks that led us into decline, many of them highly sensitive to interest rates, have been showing signs of strength all year, which is one reason the Dow Jones Industrial Average is getting surprisingly close to its all-time high. 3M (MMM) jumped over $7 alone one day last week, suddenly acting like a hot new thing. Some of the industrial companies I've recommended in this column — Emerson Electric (EMR), General Electric (GE), Tyco International (TYC) — have also done well.
Though dot-coms are still falling by the wayside, many of the survivors are showing a profit and their stocks are rebounding. Overall Internet usage continues to grow. Though the successful Internet companies in some cases still need to improve their balance sheets, the capital markets, which had been all but closed to them, will again be available once they show they can make more money than they spend. Eventually they will resume capital spending, and this will revive the Internet infrastructure companies, from Sun Microsystems (SUNW) to Exodus Communications (EXDS).
'm not sure anyone can explain the mysterious collapse in demand for personal computers this past year, but major producers and suppliers, from Dell Computer (DELL) to Hewlett-Packard (HWP), have recently indicated that sales seem to have hit bottom and that they expect to see some improvement later in the year. Surely the world-wide market for PCs isn't saturated. Recovery is well underway in the chip and chip-equipment sectors, with companies like Applied Materials (AMAT), which led the sector's decline, already up strongly this year.
And now it should be telecom's turn. The major carriers and their suppliers remain among the most battered sectors in the market, and I know plenty of investors, having been burned so badly, don't even want to hear their names mentioned. But in my view, many of them now represent compelling bargains. Among the carriers, I especially like Qwest Communications (Q), Verizon, SBC Communications (SBC) and WorldCom. Once their shares begin to rise, the equipment suppliers should follow. This should give us time to revisit the equipment sector in a future column, but for now, holders of stocks like Nortel and Lucent, however unhappy, should hold them and be patient. If France's Alcaltel (ALA) is sniffing around the likes of Lucent, then these stocks are bargains. |
