Trader says there's no hurry to buy
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 12:14 AM ET May 1, 2002
SAN FRANCISCO (CBS.MW) - The weeks-long tech stock selloff and subsequent one-day Nasdaq rally presents investors with a big-time opportunity.
"Yeah -- it's an opportunity to relax, have a glass of wine, and do your homework on stocks," says David Briggs, chief equity trader, who manages billions at Federated Investors in Pittsburgh.
Briggs is one of many investors who isn't diving back into tech just yet. The old saying among investors is to sell in May, and stay away, since market volume declines over the summer and the gains are slim or non-existent.
With a few possible opportunities for near-term trades, he says the "stay away" part of the saying makes the most sense.
Tech stocks still cost too much for the amount of earnings they produce. The situation isn't expected to improve. Analysts assume 135 percent year-over-year earnings growth in the third quarter for the 84 tech stocks listed in the S&P 500 (SPX: news, chart, profile), according to Thomson Financial/First Call.
It's inconceivable that the economy could improve enough to support a triple-digit earnings spike in the September period.
"Tech companies that are depending upon significant expansion in spending by big customers will continue to see a tough road," says Chris Bonavico, fund manager with Trans America. "Corporations aren't going to significantly ramp their spending until their sales and profits rise."
That said, professional investors are preparing for the possibility there might be a short-term chance to buy particular stocks at prices near their September lows.
Most investment pros are testing the waters carefully.
Briggs says he's taken some money away from retail stocks in the past few days and moved into a handful of tech names. Briggs and his team added to shares of Siebel Systems (SEBL: news, chart, profile) when they dipped to $27. They're now at about $25.
The challenge with Siebel is that the fast-growing software company depends on an economic recovery for future growth. Also, Siebel's management issues more stock options as a percentage of total shares outstanding than do many competitors.
Briggs has also added to U.S.-traded shares of Philips Group (PHG: news, chart, profile). The electronics conglomerate reported an unexpected first-quarter profit earlier this month, and the company's CEO declared a start to a new industry up-cycle. Shares have more than doubled since late September to about $31.
But the stock could face technical resistance at $34.
Federated also bought some Motorola shares recently, mostly due to its low stock valuation. Earlier this month, Motorola (MOT: news, chart, profile) was below its September lows, near $13.50. It's now hovering at about $15.50.
The difficulty with Motorola, of course, is that it's highly dependent on cell phone sales - both in its chip and handset businesses. The company faces low margins and stiff competition in each business.
For his part, Bonavico continues to play tech stocks very cautiously. But he hasn't completely abandoned the sector. His funds are favoring a handful of tech names right now that he says "own their markets", and also generate more far more free cash flow than the average tech stock.
While many tech companies project double-digit sales and earnings once the economy kicks in, Bonavico says he wants to own companies right now that will show him some growth even if the slowdown lasts another few years.
One of his favorites is Adobe Systems (ADBE: news, chart, profile), the company that reiterated it's second quarter targets on Tuesday night, adding that business is stabilizing in all major markets. The company is expected to report strong sales of its Photoshop design software.
Most important to Bonavico is that Adobe continues to gain market share with its Acrobat software, which is used for displaying online documents. He says it would be very difficult for anyone to unseat the company's market position. In some ways, it helps make the company less dependent on a broad economic pickup than other high-flying tech issues.
"I'm not betting on any companies where I have to bet on the economy to bail me out," Bonavico says.
Shares of Adobe have been slowly building within a range from $31 to about $40 since the beginning of the year. But the stock is at the top of its range. It also trades at more than 40 times earnings - a higher level than some of its peers.
For many of the same reasons he favors Adobe, Bonavico likes Microsoft - a stock that hasn't had a significant rise in recent years, but one that is hovering at about $52, or about $5 above its September low.
While the company continues to rack up the bulk of its profit from its desktop business, Microsoft (MSFT: news, chart, profile) is gaining ground in database software and its .NET business platform - two large business software opportunities.
But the company's earnings could be hurt by its Xbox business for the foreseeable future. While Xbox is a potentially big business opportunity, it could draw on the company's profit for another two years. To be sure, Microsoft showed a stronger profit in its March quarter than it would have with stronger Xbox sales.
Also, Microsoft's large market cap makes it an unlikely candidate for a rapid stock advance.
While Briggs and Bonavico are actively searching for good tech investments, they're still very leery of the tech market overall - and for good reason.
They're slowly adding to tech positions, if at all, while they go with what's comfortable -- a nice glass of wine while they ponder bigger and better markets.
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Mike Tarsala is a San Francisco-based reporter for CBS.MarketWatch.com. |
