Plug For The Q>
December 15, 1998
Hot Analysts in Other Sectors
By Lisa Kalis and David B. Lipshultz
THE SIX SECTORS we identified for our "Where to Invest in 1999" stock portfolio are our best bets for the next 12 months based on our
own detailed reporting, combined with Elaine Garzarelli's sector analysis. But we recognize that many readers will want to know about other
notable sectors that didn't make our final list. To bring you up to speed, we consulted top analysts in five additional industries to get their
outlook on the coming 12 months.
Autos
It's bound to be another strong year for auto manufacturers, predicts Nicolas Colas, two-time Wall Street Journal All-Star Analyst with CS
First Boston. Thanks to a generally strong economy, low interest rates and steady demand of 15 million units for the past four years in the
U.S., "we haven't seen this kind of stability since World War II."
On Colas's list of favorites is newly combined giant DaimlerChrysler (DCX), which he calls "the world's most formidable competitor in the
automotive industry." Chrysler had been doing well on its own, with record sales last year. Now a strong balance sheet, a broad range of
products and a balanced European and U.S. presence give the company an exceedingly healthy outlook. Cost savings from the merger,
projected at $1.5 billion for 1999 alone, should protect earnings even if the economy takes a turn for the worse. Colas expects earnings of
$7.42 per share in 1999.
He also likes General Motors (GM). Although last year's performance was weak due to a two-month strike in the summer, Colas believes
earnings should rise to $8 a share in 1999 -- almost double what he predicted for last year. He particularly likes this year's Chevy Silverado,
GM's first new pickup truck in a decade; if it generates the kind of sales he's expecting, it will push earnings beyond other analysts'
projections. By comparison, Colas figures Ford's (F) earnings will be flat, at about $5 a share. For the first half of the year, "Ford has
nothing dramatically new," he says. "You'll see more juice from GM."
Internet
David Readerman of NationsBanc Montgomery Securities, one of the most respected analysts in this new sector, is giving a clear warning:
"This is not the value zone," he says. With Internet stocks running like the wind in 1998 -- the IIX Internet index is up approximately 100%
for the year -- it's hard to find any air left to pump up this oxygen-deprived sector.
Still, as demand continues to surge in Internet use because of growing interest in cable-TV connections, palmtops, Internet phones and
other products, some stocks will certainly stay aloft, he says. Here's a short list of which stocks Readerman thinks could make you
money. (Just don't expect the mammoth returns you were lucky to get if you bought Yahoo! (YHOO) this time last year.)
Readerman's top pick is America Online (AOL), a stock he has been following with great results since 1995. (He downgraded it to Hold in
1996, just before its well-publicized busy-signal problems, and then upgraded it to Buy in time for its spectacular runup.) The combination of
Netscape (NSCP) and AOL, he says, will bring in some of the most diversified types of revenue on the Net -- from ad sales to subscriber
income -- and enough clout to make Microsoft (MSFT) nervous. By the end of 1999, he predicts, the stock could get as high as 125,
representing a gain of 42%.
Readerman also maintains an "acorn" list of companies that, while tiny now, could eventually bloom. His two favorites from that bunch are
Internet security companies Verisign (VRSN) and Entrust (ENTU). Both, predicts Readerman, will likely become profitable next year.
"When an Internet company becomes profitable, it brings in a whole different clientele of investors," he says. This could mean a 25% boost
for both.
And don't forget old reliable Microsoft, says Readerman. With NT 5.0 networking software coming out next year and President Steve Balmer
doing some cost-cutting in the company's Internet operation, he sees continued upside, even with the antitrust trial hanging over MSFT.
Look for better earnings than forecast and no final result on the antitrust suit at least till the end of the year, Readerman predicts. That could
push the stock up to 160, he thinks.
Oil
Low prices, weakened demand in Asia and Mother Nature all contributed to a lackluster 1998 for oil companies. What the coming year
holds isn't so clear, but Benjamin Rice Jr., an analyst with Brown Brothers Harriman, isn't exactly optimistic. "We frankly think performance
is going to be weak," says Rice, a five-time Wall Street Journal All-Star.
Officially, Rice is estimating oil will rise to $14.50 a barrel, from around $11, as earnings rebound some 30% from last year's beaten-down
levels. But Rice concedes that earnings estimate is "very hopeful."
Worldwide inventories were up almost 5% by the end of 1998 because of the warm weather brought by El Niño, and if temperatures don't
drop this winter, that will carry over. Meanwhile, last year a number of oil-producing countries agreed to cut production by over two million
barrels a day; by fall, those countries fell short of that goal by almost 10%. The biggest offenders included Venezuela, Iran and Indonesia.
"Essentially, we need to have 100% compliance" if the oil companies are going to see anything like 30% earnings growth, says Rice.
Oil companies themselves are downbeat, he adds. "They're telling us that they see a bleak environment for the next 15 months, and they're
making severe cutbacks on personnel and spending." Late last year, for instance, Royal Dutch/Shell Group (RD) and Texaco (TX)
announced they were cutting a combined 4,000 jobs due to low oil prices. That should help improve margins, at least.
Rice hasn't yet come out with a firm opinion on the newly announced Exxon (XON)-Mobil (MOB) merger. But he does recommend Royal
Dutch Petroleum. Although its third quarter of 1998 was disappointing, "It's the toughest of all the companies," he says. "It has outpaced
Exxon substantially in reserve additions and production. It just needs to thin down." Rice forecasts a price of $55 by the end of the year.
Semiconductors
David Wu, ABN Amro's three-time Wall Street Journal All-Star Analyst, isn't pounding the tables for his industry right now. It's not that he is
especially gloomy. Indeed, Wu thinks that because chipmakers are cutting back on capital spending, the overcapacity plaguing the industry
may dwindle. It's just that, with a 35% rebound in semiconductor stocks this fall, he doesn't see much of an immediate upside. "Hey,
nothing's cheap right now," he observes. "There's nothing that's going to give you a 50% move."
That said, Wu likes Intel (INTC). It has cut costs and streamlined operations, so margins will rise. And with more complex software
applications hitting the shelves daily, demand for its more sophisticated processors should remain steady. But his price target of $115 for
next year means only about 3% appreciation.
Wu also thinks highly of Texas Instruments (TXN). It's the leader in the fastest-growing business for chipmakers: digital signal processing,
or DSP. These chips are essential in wireless phones, as well as in disk drives and modems. Wu figures the digital signal processing
business, which represents around 20% of the company's revenue, will grow by 30% for Texas Instruments this year. Still, given the stock's
recent run, "I don't think it's a Buy right now," says Wu.
Among analog-chip makers, Wu leans toward Linear Technology (LLTC). Because its high-performance integrated circuits are so difficult
to make, the company's gross margins are 70%. And because buyer lead times are shortening, he sees more orders on the horizon. His
target price: $80.
Telecom Equipment
The developing world needs to build up telecommunications services regardless of recent economic plight, Internet and wireless are
merging, and the appetite for "bandwidth" -- or bigger, faster connections -- is heavier than ever. Thus, even though
telecommunications-equipment stocks got crunched in late summer and early fall, says Lior Bregman, a five-time Wall Street Journal
All-Star Analyst at CIBC Oppenheimer, it's time for a recovery.
Where to invest in this dynamic market? Because they were hardest hit and consolidation is sweeping the industry, Bregman says small
caps are the best place to put your money. He likes Stanford Telecommunications (STII). This tiny satellite-equipment and software
provider for the defense industry, with a market value of just $150 million, is currently slumping. Bregman figures the defense part of the
business is worth $15 a share alone. But it's also providing the newest means of connecting networks -- so-called point-to-multipoint
wireless connections -- for telecom companies. Bregman figures this booming market makes Stanford worth another $10 over its current
value.
Among mid caps, Bregman is bullish on Qualcomm (QCOM), the wireless-network provider and cell-phone maker. As the creator of the
cellular standard CDMA, Qualcomm gets royalties from everyone who uses it. As the standard continues to grow, so will Qualcomm's
stock. "This could move its stock up 20% alone," Bregman says.
As for big caps, he likes Ericsson (ERICY). It took the worst beating of its peers and has been a laggard coming back. Cheaper than Nokia
(NOK/A), it has the most potential to surprise, he believes. Any signs of success in its recent restructuring could push the stock back to its
earlier highs. "It's the Sleeping Beauty" of the industry, he says. |
