Stock Brief by Briefing.com
Updated: 14-Aug-01
Four Major Trends
[BRIEFING.COM - Robert V. Green] Every now and then, it is worth taking a look at the major secular trends driving the marketplace. These are the largest trends, which every stock is subject to, regardless of their current economic progress and execution.
Return To Traditional Valuations
If you are a frequent reader of Briefing.com, you know that on this page, I have argued that the markets are returning to traditional valuations for months. As time goes on, this argument has only gotten stronger.
The return to traditional valuations is important, because it will not be reversed easily. If you are holding a stock which had inflated valuation metrics a year ago, it has been extremely difficult for the price to rise, as the company must "swim against the tide" of falling multiples.
An example is TriZetto. With trailing twelve month revenue of $152 million now, triple the level of one year ago ($55.7 million), you might think the stock price would have risen. But TZIX is still at $12, exactly where it was a year ago. All that has happened with TZIX is that the valuation metrics have come down, as the company has grown. The revenue has grown into the lower multiples, which is what has kept the stock price flat.
This trend is affecting all stocks, but is particularly hard for high value technology companies whose revenues have fallen. Their multiples have fallen, and the multiples have come, producing large price declines.
Of course, there are a lot of stocks, even tech stocks, for example, the RBOCs such as Verizon (VZ) or SBC (SBC) which never really got ridiculous valuations. These have had trouble increasing their stock prices, even as revenues rose as well.
The trend towards traditional valuations affects all companies, public and private. While most companies have now reached more traditional valuations, this trend is going to work against multiple expansion (higher valuation metrics) for the foreseeable future.
The Slow Fizzle
On top of this trend of a return to traditional valuations is the slow fizzle. We use this term to refer to the stock holders still clinging to the market trends of 1998 and 1999. These are investors who are still buying stories as opposed to proof.
We call it the slow fizzle because momentum investing in concepts was the driving force in 1998 and 1999. As this trend fades in 2001, there are still pockets where stocks attract concept investors.
A good example of the slow fizzle is Xybernaut (XYBR), which still trades at the high range of price/sales of 15, despite never delivering on its promise of selling untold numbers of "wearable computers." They sell only a few hundred systems each quarter, and, in last night's earnings report, reported inventory writeoffs! There are more than a dozen quarters of unfulfilled sales goals, but XYBR holders steadfastly hold on to a vision of the future and argue for the "explosion" of sales which, of course, is right around the corner.
Another example of a large company showing this trend is Exodus Communications, (EXDS) a company we feel is in serious debt trouble. But ever since the report of earnings on July 26, which was accompanied by a great cheerleading speech by CEO Ellen Hancock in the conference call, the stock has rallied. But the rally is based on Ms. Hancock's speech, and not on the financial statements.
Why the term "slow fizzle?" Because the number and buying power of investors willing to put their money into concepts is fading. From the roar of the great bubble of 1999 this trend has dwindled to the quiet sound of small bubbles, like a glass of Alka-Seltzer.
The story no longer matters. Stocks will improve only on results. There are still some investors who haven't learned this, and we call them the last fizzles of the bubble.
Across The Board Technology Collapse
The great growth boom of the last 10 years in technology stocks hit a brick wall in 2001. Every major sector of technology investing has experienced an almost unprecedented slowing of growth. Here's a list:
PCs: the first forecast of negative growth ever for PCs occurred this year.
Wireless: handset inventory problems? Unheard of in the past five years, but common now.
Telecom startups: CLECs are folding everywhere.
Bandwidth glut: from fiber optic networks to the equipment suppliers to the component manufacturers: the growth is over.
Last mile: DSL never happened, cable modems are stalled, what ever happened to broadband?
The entire computer technology and networking market has turned out to be a classic bubble and burst. And this doesn't even include the internet dot-com stocks.
The shadow of this trend is covering the entire market, as technology was a leading force in the marketplace for the past three years. The Dow hasn't moved in three years, and it may be a long time before technology leads the market again.
The trend overshadowing the market now is the lack of a leader and that lack is due to the collapse of technology, in real terms, not just valuations.
Until the market adopts a new leading sector, the collapse of the technology marketplace will cast a long shadow on any other developments. (Note: our guess today is that financial services will become the new leader, but there is no real evidence to support that assertion today.)
Economy Stuck In Neutral
Meanwhile, the biggest trend of all is the economic trend. While many argue over whether this is technically a recession, there is no question that the overall economy has stalled, and is trending toward slower growth.
Interest rate cuts haven't fired up the economy, or the market. The tax cut checks aren't likely to be much of a boost. The rest of the world certainly isn't leading the US out of the quagmire.
But it isn't as bad as even the most recent recession in memory, in 1990.
Nevertheless, as long as the economic sky looks overcast, the market is going to be reluctant to move. It may never rain, but that won't matter. Until the memory of the boom years is over, economic sluggishness is going to look bad, rather than the neutral it really is.
Adds Up To?
Put all of these trends together and what do you get?
A difficult market, and one which does not make investing easy. It could be a couple of years before investing becomes easier. If you want to stay invested, you need to maintain a disciplined approach. You also need to invest with the largest trends in mind.
How to react to these major trends? Here are some pointers.
Trend/Approach
Traditional Valuations Don't overpay. Avoid highly overvalued stocks. For revenues over $50 million, avoid P/S over 10, and PEs higher than 40. The risk is high.
Slow Fizzle You can still make short term trades on stocks, that are subject to bursts based on stories. But don't confuse a trading premise with an investment premise. The market's willingness to support "concept" stocks is likely to lessen, not increase for the foreseeable future. Concept stocks are not good investments now.
Technology Collapse Avoid technology tools vendors. Platform investments are okay, but will require patience. (Note: the PC, and Windows, is no longer a platform product.) Component companies will struggle until the overall market improves, but will probably be a leading indicator. (A killer application for broadband would change everything.)
Economy Stuck Look at your overall portfolio. Consider increasing the bond percentage, if you have not done so already. Could be a while before a rebound, and interest checks might look pretty good a year from now.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com |
