What Can Go Wrong? Everything, Part 2
RealMoney.com's MIDDAY UPDATE
July 19, 2000
http://www.realmoney.com
Market Data as of 7/19/00, 11:50 AM ET:
o Dow Jones Industrial Average: 10,704.57 down 35.35, -0.33%
o Nasdaq Composite Index: 4,093.91 down 83.26, -1.99%
o S&P 500: 1,483.26 down 10.48, -0.70%
o TSC Internet: 835.24 down 32.54, -3.75%
o Russell 2000: 529.88 down 6.40, -1.19%
o 30-Year Treasury: 104 22/32 down 1/32, yield 5.904%
In Today's Bulletin:
o The TaskMaster: Bears Set a Trap but Tech Stocks May Wriggle Free
Wrong! Tactics and Strategies: What Can Go Wrong? Everything, Part 2
When a company can't meet estimates, the stock is likely to take a beating.
http://www.thestreet.com/p/comment/wrongtactics/1007049.html
Herb on TheStreet: How Good Were Earnings
Really
TheStreet Recommends
for Intel, Microsoft?
Also, why short-sellers are betting against Copper Mountain.
http://www.thestreet.com/p/comment/herbonthestreet/1006359.html
SiliconStreet.com: The Barksdale Group's Chief Juggling Officer
One-time Netscape CFO Peter Currie now oversees a venture portfolio that includes HomeGrocer, Tellme and ViAir.
http://www.thestreet.com/p/comment/siliconstreet/1006322.html
David Kurapka: With a Tax Burden Light as a
Luftballoon
, German Market Lifts
New tax reform will stimulate Germany's equity market, corporate earnings and foreign investment.
http://www.thestreet.com/funds/davidkurapka/1006462.html
Networking: Lucent, Nortel Facing the Strong-Demand Music
Margins and revenue growth will get the most scrutiny as investors weigh whether the companies are keeping up.
http://www.thestreet.com/tech/networking/1005652.html
This Week's Secondaries: Chips 'N' Dip
This week's secondaries are all about semiconductors, but you have to wonder about the timing.
http://www.thestreet.com/p/comment/weekssecondaries/1004317.html
Dear Dagen: Of All Brokers Great and Small, Which Is Right for You?
A recent column offered eight steps to take before hiring a broker. Here are a few amendments.
http://www.thestreet.com/funds/deardagen/1007006.html
Analyst Actions: Analyst Actions: Microsoft, Tricon, Associates First, Bausch & Lomb, Boston Scientific
http://www.thestreet.com/markets/upgrades/1006928.html
The TaskMaster: Bears Set a Trap but Tech Stocks May Wriggle Free
By
Aaron L. Task
Senior Writer
7/18/00 9:32 PM ET
SAN FRANCISCO -- You knew it was coming. Did you bake a cake?
It, of course, being the setback the
Nasdaq Composite
sustained Tuesday. When I
forecast as much last week (admittedly, 100 Comp points too soon), many readers emailed to say, in so many words: "Well, duh."
Now that the pause is apparently here, investors seem pretty sanguine. The Nasdaq fell 2.3% Tuesday but closed above its late-morning lows of 4161.89. Similarly, the
Dow Jones Industrial Average
fell 0.6% and the
S&P 500
shed 1.1%, but closed above their respective intraday lows.
"The bears will say it's the end of the correction to the upside and there's a big downturn coming," Gregg Schreiber, vice president of institutional futures sales at
Bear Stearns
, said of Tuesday's action. "But if earnings are going to keep coming in positive, that's going to be wrong."
After the close of trading Tuesday, two of the most gargantuan tech behemoths did their part to ensure the bearish argument proves too cold.
Intel
(INTC) - Get Intel Corporation Report
posted
second-quarter earnings of 50 cents a share (postsplit), a penny better than expectations. Revenue of $8.3 billion was at the high end of the expected range. Additionally, the company forecast strong demand continuing in the second half.
Microsoft
(MSFT) - Get Microsoft Corporation Report
was less ebullient about its
forward outlook -- forecasting roughly 15% revenue growth for fiscal 2001 -- although dowdy guidance is consistent with the company's
modus operandi
. The software colossus reported fiscal fourth-quarter earnings of 44 cents a share, 2 cents better than expectations. The company produced revenue of $5.8 billion, roughly in line with expectations.
Shares of both companies were up in after-hours trading, suggesting investors were not disturbed by the positive impact from investment income -- $2.3 billion at Intel (vs. initial guidance of $725 million) and $1.1 billion at 'Soft.
But there could be cause for concern at Microsoft.
CFO John Connors said in the company's conference call that its first-quarter earnings would be 41 cents a share. The consensus estimate is 43 cents, according to
First Call/Thomson Financial
. Connors did say the company would meet the full-year estimate of $1.88, meaning he thinks the company can recoup those 2 cents somewhere in the next 12 months.
Ulric Weil, technology strategist at
Friedman Billing Ramsey
in Arlington, Va., wasn't terribly concerned about the projections, noting the company's penchant for conservatism.
Furthermore, as Microsoft's shares fell in the wake of its legal troubles and disappointing fiscal third-quarter, the valuation on its stock has come down considerably vs. peers such as
Cisco
(CSCO) - Get Cisco Systems, Inc. Report
. Thus, Microsoft "doesn't have to make promises they'll have a tough time keeping," he said. "If Cisco said something like
Microsoft said, their stock would get hurt badly. Microsoft can afford to be very cautious."
Kudos, then, to Microsoft for turning vice into virtue. But another area of potential concern is the company's terse statement that it is not reinstating its buyback program, a decision for which it offered little rationale. Institutional investors, such as Gary Kaminsky at
Neuberger & Berman
, were anticipating a
buyback announcement and could be disappointed none was forthcoming. (Kaminsky was unavailable for comment Tuesday evening.)
But as with the earnings guidance, Weil was unconcerned about the lack of buyback news.
"For all we know,
Microsoft may not want to make a display of doing well," he said. "They're in the midst of a legal battle, and it doesn't help them to appear flush."
Despite his general
laissez faire
attitude, the analyst forecast the stock will not make much progress until corporate demand for PCs firms up.
On a somewhat surreal note, the antitrust case got nary a mention in Microsoft's conference call, save for the very end. COO Robert Herbold said the company expects the
Supreme Court
to rule in September on whether it will hear the case or refer it first to the
U.S. Court of Appeals for the District of Columbia Circuit
.
All in Stride
Prior to the Microsoft-Intel double bill, Rick Ziesing, founder of
Versant Advisors
(formerly
Bonanza Capital Management
) in Kennett Square, Pa., expressed little concern about Tuesday's decline.
"We were due for a little setback, as the money we have made in the last week has been obscene," the hedge fund manager observed.
Versant's main hedge fund was up 20.4% net of fees for the year as of July 17, due largely to a fortuitous decision to go to 100% cash on March 13. The roughly $15 million fund is currently 120% long and 5% short.
"We have been easing back in to our present margined state over the past month or so," Ziesing explained. "We think the
Fed
is on hold and the market is primed to run."
The hedge fund manager said earnings in sectors such as semiconductors, optical networking and components, wireless devices, and data storage are "just smoking," giving him faith there's more room for appreciation in growth stocks.
Some of Ziesing's favorite longs include Cisco,
Nortel
(NT)
,
JDS Uniphase
(JDSU)
,
Applied Micro Circuits
(AMCC)
,
Vitesse Semiconductor
(VTSS)
,
PMC-Sierra
(PMCS)
, and
RF Micro Devices
(RFMD)
.
Like most investors, Ziesing did not feel compelled to take action during Tuesday's setback.
"I cannot trade a tape where stocks and indexes move multiple percentage points in a day -- or hour -- so we place our bets and wait for the rest of the herd to figure out what we think we already know," he said.
Indeed, several of Ziesing's long positions had big moves Tuesday:
Broadcom
undefined
,
Sycamore Networks
(SCMR)
, and
Sawtech
(SAWS)
each fell more than 5%, while
Mercury Interactive
(MERQ)
rose 5.8%. (After the close, Broadcom reported second-quarter earnings of 23 cents per share, 4 cents ahead of expectations.)
"We remain bullish, and we think that in the end, growth in revenues and real earnings will always be the most intelligent way to deploy funds," he said.
The fund is also long smaller tech plays such as
HI/FN
(HIFN)
,
Avanex
(AVNX)
,
Aeroflex
(ARXX)
,
Brocade
(BRCD)
,
Cobalt Networks
(COBT)
and
Packeteer
(PKTR)
.
Conversely, his shorts are focused on consumer-oriented companies such as
Clorox
(CLX) - Get Clorox Company Report
,
Colgate Palmolive
(CL) - Get Colgate-Palmolive Company Report
and
Avon Products
(AVP) - Get Avon Products, Inc. Report
, believing they may be susceptible to (additional) weakness if the economy continues to slow.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at
taskmaster@thestreet.com .
Copyright 2000 TheStreet.com, Inc. All rights reserved.
