Briggs likes AMAT and LRCX
marketwatch.com{429999B5-0147-429A-AF23-2F596B271228}&siteid=yhoo
Rate hike won't cripple tech stocks
Commentary: And there are some values to be had
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 12:01 AM ET May 5, 2004
SAN FRANCISCO (CBS.MW) -- In Fedspeak, the open market committee all but told the world yesterday to expect an interest rate hike ahead of the presidential election in November, a move that should excite, not scare technology investors.
"When the Fed raises rates, tech stocks usually do OK," says David Briggs, chief equities trader at Federated Investors in Pittsburgh. "When rates are going up, the economy is getting better, and the drivers of the economy usually benefit."
To test Briggs' theory, I took a look this week at changes in the daily effective Fed funds rate dating back to the early years of Alan Greenspan's first term as Fed chief. I shouldn't be surprised that Briggs is right. Technology stocks moved higher in a 12-month period at the start of four of the five past rate-tightening cycles under Greenspan, dating back to 1988. The only time they didn't rise was when the daily effective funds rate began rose from a nadir in August 1987 -- the same month Greenspan took office.
Supposedly, stocks don't do well when interest rate rise. Higher rates tend to slow down economic growth and increase the cost of doing business for all companies. Higher rates also tend to push the possibility of dividend payouts farther into the future, which spells trouble for investors who buy stocks based on their discounted stream of cash flows and dividends.
In addition, there's a fear among some on Wall Street that rising rates could trigger the insolvency of one or more overleveraged financial institutions -- something that has happened during other rate-tightening cycles. If that happens, it could lead to an expensive financial bailout and another costly hit to shareholder confidence that could send tech stocks tumbling.
"Wall Street is concerned that there are hedge funds out there that are addicted to tremendous short-term borrowing, that rising rates will trigger a financial burnout, and that there could be a spillover effect with counter-party risks spread among several firms," says Janes T. Swanson, chief investment strategist for MFS Investment Management, who oversees $142 billion in assets.
Yet most economists say most investor fears about rates are overblown. For example, if Wall Street is really concerned about the meltdown of a financial firm or two, that risk is likely factored in to current stock prices.
One reason tech stocks may do well in periods of rising rates is that most publicly traded technology companies have no debt. They don't' have to anything to finance with the higher rates. And while their customers certainly finance equipment, a few quarter-point increases won't be enough to put the brakes on demand for computers, chips, software and networking gear.
Meanwhile, there are signs in the gross domestic product figures and in corporate earnings reports that spending in the corporate sector is finally starting to improve -- one more reason the Fed feels comfortable in raising rates.
Briggs says some stocks are overvalued, such as high-flying stun-gun maker and media darling Taser (TASR: news, chart, profile), which trades at more than 60 times earnings. Yet he says there are a few good ones that are worth their price. His firm recently bought up more of chip equipment-maker Applied Materials' (AMAT: news, chart, profile) shares, and he says he likes LAM Research (LRCX: news, chart, profile).
Value plays are out there, too. Nokia (NOK: news, chart, profile), which owns about a third of the worldwide cell phone market, is starting to draw the attention of several large hedge fund managers. Even though the company reported a lackluster first-quarter in which it lost market share and guided below analyst expectations for the first quarter, a turnaround is possible later this year, as the company rolls out new flip phones, recently a more popular option than the candy-bar-size phone designs.
Nokia sure seems cheap. It's still generating cash, trades at about 14 times 2005 earnings estimates, is down 38 percent from its March peak, has about $2.50 a share in cash on the book. Plus, it has a 2.5 percent dividend yield, points out Al Davis, analyst with McAdams Wright Ragen, so shareholders get paid even if a turnaround takes a while.
Technology shareholders should quit fretting and remember why there's pressure to raise rates. It's because things are looking up. Rising demand for credit reflects an expanding economy and increased purchases of technology goods and services.
A small hike or two is in order, considering that the key funds rate remains at a 46-year low. That's hardly enough to derail the economy or the technology stock market.
Mike Tarsala is a San Francisco-based reporter for CBS.MarketWatch.com. |
