In the early 1990s there was a Broadway review called
Without You I'm Nothing
. Can't remember what it was about, but the title pretty much sums up how I'm feeling as I finish yet another reader-inspired column.
Not that I've stopped generating ideas. It's just that readers are coming up with better ones. For example, a money manager who prefers to remain anonymous points out that sector rotation doesn't have to mean shifting from biotech or photonics to (yawn) grocery stores or insurance companies. It's possible, and potentially more lucrative, to rotate among growth stock categories.
"In technology, yesterday's hero is tomorrow's zero, and vice versa," he writes. No argument here: In the past few years, hot money has launched and then crashed (and sometimes launched again) B2C, B2B, ISPs, back-office software, semiconductors and biotech.
In this kind of free-for-all, stock picking becomes less important than simple location. "If you buy an already hot sector and for whatever reason the market rotates out of it, you're down 50% very fast." It's better, he says, to "Find a down-and-out sector and look for a reason for the money to rotate back in. This limits your risks and could give you huge upside." Think biotech in 1998, where stocks the world had forgotten spent the next year in a pretty much continuous upward gap.
The attraction of playing tech this way is that it satisfies the need for 10-bagger potential while letting you dis the crowd, by focusing on stocks at 12-month lows rather than all-time highs. You stay with exciting stories, but get to buy when there's blood in the street and sell when the champagne corks start popping.
So what will the hot money like next? My source likes software, especially on the mainframe side. Right now, a slowdown in orders is being blamed on everything from corporations waiting for a new release from IBM to a simple lack of urgency following the Y2K code writing orgy.
Whatever the cause, "The
leading software vendors have been killed."
, for instance, is down from 40 to 9 in the past seven months, and is now trading at less than 1.5 times sales, with plenty of operating leverage. "I believe it has EPS potential of $1.10-$1.25 in 2002, so if the industry stabilizes you could see a double in 6-18 months."
And check out
, which blew up a month ago when its first-quarter earnings printed way below expectations. Go to the Yahoo! research page for this stock and you'll find a stomach-churning descent in analyst earnings estimates for the June quarter, from 60 cents 90 days ago to 14 cents currently. That's the kind of thing that sends growth fund managers running for the exits and makes a stock ripe for the next go-round. But maybe not just yet. The fact that analysts have cut estimates for the following quarter only from 88 cents to 73 cents implies that at least one more big disappointment is possible.
Other companies on the money manager's list include
, which, after increasing its earnings at a 28% rate for the past five years, is now expected to report an increase of only 6.3% in 2000. There are now the same number of "hold" ratings on the stock as "buys," which, among congenitally optimistic brokerage house analysts, is about as close to a mass-shunning as you can get.
, meanwhile, grew its earnings by 29% a year for five years but will, according to analyst consensus, show a decline in 2000. Its stock is at 11, down from 49, and its P/E ratio (on trailing 12-month numbers) is around 8. Yet the consensus forecast calls for growth of 25% in 2001.
One last pick is
Great Plains Software
, a maker of enterprise and supply chain management software, which somehow managed to lose money on a 50% increase in March quarter revenues. After peaking at 83 in January, its stock is now below 20.
There's a trick to the blood-in-the-streets approach, though: figuring out how much blood is enough. For most of these companies, earnings estimates have only been scaled back slightly for the coming year, so it's very possible that more explosions will occur. Of course, they'll sting less with a stock that's already down by 70%.
So the key is order flow. If this is the beginning of a prolonged slowdown in global software demand, then it's going to get even uglier for these companies. But if demand starts to recover, says the money manager, "these stocks will fly in 2001."
John Rubino, a former equity and bond analyst, is a frequent contributor to Individual Investor, Your Money and Consumers Digest. His first book, Main Street, Not Wall Street, was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at