Tyco Again Suffers the Market's Wrath

This stock is starting to look like an old dishrag -- it stays dirty no matter how often you wring it out. Plus, a bullish economic forecast.
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Trouble With a Capital 'T'

Tyco International

(TYC)

fell another 4.1% on virtually no news

today, while the

Nasdaq

grew further still and blue-chip proxies retreated modestly. My interest was further piqued by the fact over 25.8 million shares traded, making Tyco Wall Street's second most actively traded stock.

With that kind of action, even the company's fans are having a hard time leading the cheer. "I don't think the market is ever going to give the stock the kind of valuation like it had in the past," said Barry Hyman, chief market strategist of

Ehrenkrantz King Nussbaum

, which is long Tyco. "Wall Street is obsessed in believing something is wrong."

And that's why this stock is starting to look like an old dishrag that stays dirty no matter how often you wring it out -- among the reasons it garnered no less than

three turkeys in my recent Thanksgiving awards.

The "news" from the company -- and it didn't come until late in the session -- was that it expects to meet analysts' estimates for fourth-quarter earnings and that Tyco closed the acquisition of

Praegitzer Industries

(PGTZ)

for $5.50 a share. Such developments hardly seem worthy of a 4% decline, much less on such heavy trading.

Tyco did pay

cash

for Praegitzer, a notable change from its past practice of using shares to facilitate a long string of acquisitions. The altering of its

modus operandi

came in mid-October, when (you'll recall)

critical comments from

David Tice & Associates

sent Tyco's "acquisition currency" reeling. Since peaking at 53 1/4 on Oct. 8 -- just before Tice's comments received widespread publicity -- the company's shares are off about 33%.

Hyman admits that investors are averse to owning any stock stained by the negative brush ahead of year-end, but he does not think anything is "wrong" with the company. Still, he doesn't expect Tyco to soon achieve much more than a price-to-earnings ratio of 20 times its future earnings (vs. around 14 times currently). That equates to a price of around 50 in the "best-case scenario," he observed, judging by the consensus estimate for 2001 of $2.55 a share.

Tyco has reiterated repeatedly there's nothing evil lurking in its books, and that it will meet estimates. But the pronouncements seem to be greeted as a case of traders thinking the company protests too much.

"I'd rather not see Tyco come and say 'we'll be on target' every time the stock falls," Hyman said. "Enough already. Wall Street wants to see how they're going to continue to grow the company. That's more important than the reiterations."

I

return to the Tyco story not because I have a vendetta against the company or its shareholders. Rather, Tyco can serve as a cautionary tale to those enraptured by the market's current momentum. Don't forget, back in its heyday, Tyco was the

JDS Uniphase

(JDSU)

or

Red Hat

(RHAT)

of its era. To wit, Tyco rose over 120% for the 12 months prior to its setback this October.

Right now there is "extreme momentum to the upside" for many tech stocks, as Hyman says. But Tyco serves as a classic example of what "extreme momentum" looks (and smells) like in the other directions.

Tyco's spokesman did not return a phone call seeking comment.

Too Much of a Good Thing

In a conference call today,

Lehman Brothers

chief U.S. economist

Stephen Slifer

announced that on Friday he initiated a "big upward revision" to his fourth-quarter

gross domestic product

estimate to 5.5% from 4.3%. Also, he upped the first-quarter GDP estimate to 2.6% from 1.9%.

"Bottom line, there's a lot more growth coming into 2000 than we might have thought," the economist said, making a concession to the fact he (like many peers) has consistently underestimated the economy's robustness in recent months.

That view, plus his belief the "core inflation rate" has "bottomed" and may be "inching higher" in the coming months, compelled Slifer to admit "it's hard to be so sanguine" about the

Federal Reserve

, as he has previously been.

Slifer now expects the Fed to give "a couple more tugs on the reins" -- to the tune of 50 basis points of tightening -- by mid-year 2000, with the first rate hike at its February meeting.

That the Fed will not raise interest rates at its December meeting is all but certain, according to the consensus thinking on Wall Street. But a growing number of players -- even some long bullish on equities and/or adherents of the high growth/low inflation-forever mantra -- fret

Alan Greenspan

& Co. will tighten at the first opportunity in the new millennium.

Lehman's chief investment strategist

Jeffery Applegate

could not participate in today's conference call because he is on jury duty (no word on what kind of case). But Slifer ventured to guess his forecast revisions won't force Applegate to alter his views too dramatically, as was the case

last time. Currently, Applegate has a 1550 target for the

S&P 500

for next year, the economist said.

More Fed action in 2000 won't be "particularly troublesome from an equity viewpoint," he added. "It's meant to slow the economy just a bit, not stomp on growth or wring out inflation."

Additionally, the Fed's three rate hikes this year "don't look like they've had a significant

negative impact on stocks thus far," Slifer observed.

Indeed, every rate hike in this cycle has been greeted with the celebratory cheer that it will be the Fed's last for the foreseeable future. So it makes

perfect sense

that prospects for a few more shouldn't get anybody overly concerned.

Doesn't it?

Aaron L. Task writes Monday through Thursday 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.