TECHWATCH
Getting ready for the tech bottom
Commentary: If it's here, don't play the old favorites
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 12:10 AM ET Sept. 26, 2001
SAN FRANCISCO (CBS.MW) - Is it time to load up on Cisco? Are tech stocks set to rally from
here? Did we hit bottom?
The answer to the first question is no, the
second answer is possibly, and the third is
we'll know in a matter of days, says
legendary investor William O'Neil, founder
of Investor's Business Daily.
O'Neil, like the many investors who follow
his teachings, are waiting to see if last
week's strong market sell-off and Monday's
rally on strong volume signal the
long-awaited cave-in that will flush the
stock market clean. If it is, it could put
major tech indices in a position to start a
multi-year climb once again.
According to O'Neil's rules, a market
bottom is easy to spot. Wait for a big
market rally on higher than average volume
- the kind we had on Monday. Ignore the
subsequent two trading days - Tuesday and Wednesday.
Then, start looking on Thursday and for the following week for signs of a second rally attempt.
According to his rules, trading volume on the second rally has to be higher than the 50-day average,
higher than the previous day's volume, and it must produce a rise on the Dow, S&P or Nasdaq, of 2
percent or more.
"We consider that as a second attempt to show strength coming up from the bottom," O'Neil said. He
says he's used the system for more than 30 years to call major bottoms in the past, and it hasn't failed.
Listen to Bill O'Neil explain his strategy.
If the market really is building a bottom, as O'Neil suspects that it could be, it's important to recognize
that a rally will take time. We've just come off one the steepest market declines ever, and it likely will
take years to repair that kind of damage.
But individuals need to be prepared to take advantage once it's clear the bottom is here. Start he says,
by taking new positions in new stocks in leading industry groups, and resisting temptation to add
positions in familiar technology names.
Defense electronics could be a traditional tech alternative. It's group O'Neil says is showing signs for
continued stock growth, especially in the wake of the terrorist attacks on New York and the Pentagon.
Defense technology leaders include stocks including L3 Communications Holdings Inc. (LLL: news,
chart, profile), whose components play a role in nearly every defense system that the Pentagon orders.
Another is Alliant Techsystems (ATK: news, chart, profile), which makes an array of defense products
including aircraft weapons systems, smart bombs and components.
For those willing to branch out and take a risk, there are a few other industry leaders that O'Neill is
tracking through his industry groups. One is EDO Corp. (EDO: news, chart, profile), a maker of bomb
release electronics, and DRS Technologies (DRS: news, chart, profile), which makes electronic
systems for tracking military movements.
Both EDO and DRS seem to be positioned to benefit from a prolonged military conflict.
"They appear to be exceptionally well positioned in the current environment for defense," said Arnold
Ursaner, president of CJS Securities Inc. in White Plains, NY, one of the few companies that tracks the
stocks. He cites their excellent earnings track record and revenue growth prospects.
"The institutions are just beginning to discover these names. They are designed into significant
long-term replacement programs. And they're in niche markets. Their mid-tier suppliers, and they have
opportunities to acquire and to be acquired."
New York-based EDO Corp. is one of the leading suppliers of bomb release units, used in the F-15 E
and other aircraft, including the upcoming Joint Strike Fighter. The company received a $17.4 billion
contract in July to supply smart bomb rack units to the Air Force, points out John Reilly, CJS analyst.
A merger with privately held AIL Technologies in 2000 nearly doubled EDO's revenue overnight, and it
put the company in position to be a much larger supplier to prime military contractors.
In the second quarter, the company reported revenue of $66.8 million, up 18 percent, and net earnings
of $800,000, up 28 percent from the year-ago quarter.
As far as the share price goes, EDO's has had about a 30 percent run-up in its stock price since the
Sept. 11 terror attacks. But it still remains at a reasonable value based on its growth potential,
according to CJS.
EDO reported this week that it plans to offer an additional 1.7 million shares of its public stock.
DRS Technologies Inc. makes night vision technology, shipboard display systems, as well as "black
box" recording equipment for the military. The company has plans to reach $1 billion in revenue by
2004, implying a three-year annual growth rate of 33.5 percent.
It had a solid fiscal-first quarter. The company has its highest funded backlog in its history, except for
its sales growth. Revenue for the three months ended June 30 were $103.4 million, up 9 percent over
revenues of $94.5 million for the same period last year. Earnings before interest, taxes, depreciation
and amortization were a first quarter record at $12.4 million, a 12 percent rise.
If the company is able to match its sales targets, it could be a bargain. The company's market value
remains lower than its annual revenue of $427 million.
To be sure, defense electronics stocks have had their pop following the air attacks. But it could be a
better holding than Cisco Systems, or Intel just because the bellwethers have fallen so much.
"You don't want to buy the stock that's down the most," O'Neil says. "You don't want to buy Cisco just
because it's down a lot"
In short, start looking for new leaders - not just the bottom.
Mike Tarsala is a San Francisco-based reporter for CBS.MarketWatch.com. |
