Gotta love these articles.....AMAT is a momentum play with nothing really going for it, but CSCO and INTC are technology leaders which will be good bets once the recovery begins.....compare the two bolded sections. CSCO and INTC are solid, and AMAT is speculative?
yahoo.businessweek.com
They have a point. Mutual- and pension-fund managers are judged according to a benchmark index and, if one stock or a group of stocks in it is shooting up, they can't afford to be left behind. They all pile in, creating a bandwagon effect. Consider Applied Materials (AMAT ) Inc., which has one of the largest market caps in the S&P 500 IT index. The stock has run up 57% since Mar. 31, to $19.77, even as analysts have trimmed their earnings estimates from 49 cents a share to 46 cents for the fiscal year through October, 2004, according to Thomson First Call.
Why do momentum traders have such clout? Simple. They control at least one-third of the money invested in tech stocks, says Walter C. Price Jr., veteran manager of the Pimco RCM Global Technology Fund. And if they can power sharp and fast runups in prices, their impact can be equally vertiginous if they fall out of love with a shooting-star stock. During the past 12 months, one-third of tech stocks suffered single-day drops of at least 20%, according to UBS Research (UBS ) One of them, Nokia (NOK ) Corp., plunged 20% on July 17 after execs said the fall in the U.S. dollar would halt revenue growth from mobile-phone sales in this year's third quarter.
Another big group of traders looks for movement of another kind -- in earnings. They focus on companies they think are likely to beat the market's expectations. A positive earnings surprise can produce a real pop. For example, eBay Inc., whose stock has been one of the star performers in the past year, has beaten earnings estimates by 2 cents to 5 cents a share in each of the past four quarters. The same can happen when Wall Street's much-maligned analysts raise their estimates of company earnings.
A classic example is SanDisk (SNDK ) Corp., a leading supplier of flash memory for digital cameras. The stock shot up 246%, to $58.32, from Mar. 31 through Aug. 4 as estimates for this year's earnings more than doubled from 84 cents a share to $1.87. Estimates are soaring because the flash memory that the company makes is in short supply as demand for digital cameras climbs. The problem for the stock, says Price, is that the profit windfall to the company won't last when competition moves in and demand growth slows. "Everyone who owns that stock knows they will have to sell, whether today or six months from now," he says.
As anyone who went along for the wild late '90s ride in stocks knows, traders can't resist a good story. The merest hint that a company has a dazzling product is often enough to set its stock alight. Shares of wireless-chip supplier Unova (UNA ) Inc., for example, rose 10%, to $11, on June 26 after MSN.com reported on the potential of its RFID, or radio frequency identification, tags, which track retail products. Since these smart tags are in their infancy and the company is losing money, the story and the hope that it might one day become a big money-spinner powered it higher.
Still, the frontier between trading stocks and investing stocks isn't fenced off. Stocks can cross and re-cross the border with regularity. Intel shares are up more than 54% since March, driven initially by attractive fundamentals. But lately, the momentum crowd has jumped aboard for the ride. Meantime, other traders are attracted by the prospects of upward revisions of earnings estimates as the economy improves. In fact, earnings revisions and stock-price momentum are historically highly effective predictors of stock returns a year later, according to Vadim Zlotnikov, chief investment strategist at Sanford C. Bernstein & Co.
Sometimes, when companies have high potential earnings growth, it can be difficult to tell whether the stocks are moving on trading momentum or on real market insight into their potential future value. Consider eBay. Consensus Wall Street forecasts figure its earnings will grow from $1 a share in 2002 to $1.50 in 2003 and $2.09 next year, according to Thomson. But even if those estimates prove right, buyers of the stock are still taking a speculative plunge. With the shares at $103 recently, they were trading at 49 times the 2004 estimates, a 49% premium to the current p-e for stocks in the S&P IT index.
Clearly, investors sometimes need to think like traders. Pip Coburn, global tech-stock strategist at UBS Research, says they should consider what he calls tactical speculation. This means buying stocks of solid companies, such as Intel or Cisco Systems Inc., whose sales are fairly sure to advance as the economy recovers, giving them a good chance of pleasing traders with earnings surprises in the future. The tricky part is getting out before the smart traders start to dump the stock because they think it may soon run out of steam.
Nobody said it would ever be easy to make money in tech stocks. But life can be a lot less nerve-racking after you work out how much risk you're willing to assume -- and whether that makes you an investor or a trader. Once you've decided who you are, it's best to stick to your role. A split personality will only make it that much harder to distinguish the risks from the opportunities in the market. |
