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The week of April 10, 2000, will be
remembered for a long time to come in the minds of investors. The
bearish trend established recently continued to take shape and is
starting to tear the heart out of many investors. Companies with strong
earning reports, many beating market expectations, are taking dives. How
can this be explained? Is there any rational explanation for this market
correction and the current market condition?
Some will say that the market was
too high, that multipliers were too high, especially in the technology sector.
This is true for some stocks. Many of the dot.com stocks that have no
current earning were selling at a premium based on their future earnings
potential. These days, it seems to only take the slightest bit of
negative news to start a downward dip in the market. Many momentum
investors are getting burned. The explanation for the current market
condition is, you guessed it, there is none. Investor emotions have
taken over (i.e., the psychology factor), with overreaction commonplace
these days.
Currently, by definition, we are in a
bear market. A bear market is generally defined as any market that falls
by 20% or more. There are several examples of short bear markets. Short
bear markets have occurred February 1966 through October 1966 (25%
decline), January 1973 through December 1974 (45% decline), August 1987
through October 1987 (36% decline), and July 1990 through October 1990
(20% decline). The five bear markets observed between 1966 and August 1982 actually
were one large bear market, even though on three
occasions the market surpassed the February 1966 market high during this
time frame. So the concern is: Will this condition occur again? If we are
indeed in a bear market, it will be a short bear market. Since we have
such a strong economy, it is my educated opinion that this bear market
will be a short one.
That being said, I would like to bring up
another point. Even before the recent market correction, many stocks
were selling below fair market valuations. The technology sector was
driving the markets higher and higher while the rest of the market stood
still. What is even more surprising, if you factor in revenue growth
rates, is that many technology stocks and new economy stocks were and are
selling at more favorable valuations than many old economy industrial
stocks. The PEG (i.e., P/E ratio divided by the current or estimated
revenue growth rate of a company) can be used to help demonstrate this
fact. One example is Nokia versus GE. As of April 25, 2000, Nokia had a
P/E ratio of 92.3 and expected earnings growth of 31.5% in FY 2000,
resulting in a PEG of 2.93. As of April 25, 2000, GE had a P/E ratio of
48.4 and expected earnings growth of 15.7% in FY 2000, resulting in a PEG
of 3.32. The much higher growth rate of Nokia offsets its P/E ratio,
which is the case for many new economy stocks. In this example, based on
the PEG, Nokia is the better value. Don't buy into the fact that all
technology stocks are ove valued. By the way, the industry average PEG
for Nokia is 4.02 and the industry average PEG for GE is 0.96. Nokia's
PEG is below the industry average and GE's PEG is above the industry
average.
Even in this "short-lived" bear
market, the New Age Investor continues to keep a level head and is not
selling off his fundamentally sound equity investments. The New Age
Investor believes that new economy stocks, many of which are in the
technology sector, are the future and where money should be invested.
Sure, valuation strategists and the bear soothsayers are preaching
another tune. Stay focused on growth stocks. Buy when people are
selling and sell when people are buying. However, it may be the third or
forth quarter before negative market sentiment has been satisfactorily
erased. Eventually, positive corporate earnings, especially earnings
above market expectations, should spark a positive market sentiment
change. In the near term, stick with "gorillas" in individual
sectors (e.g., CISCO, EMC, TXN, NOK, ERICY, PMCS, JDSU, etc.). We may
not have seen the bottom of the market yet. Above all, the New Age
Investor's portfolio should be overweighed in the wireless
telecommunication industry, including suppliers to the wireless
telecommunication industry. The wireless telecommunication industry is
where the growth is at and where it will continue to be. As a New Age Investor, we want to be where the growth is.
Why will growth continue in the wireless
sector? Innovation and demand! Cellular phones are in high demand and
product improvements continue to spur growth. New improved products come
out, replacing the old product lines and helping to continue the strong revenue
growth stream. Smart cellular phones are currently being developed which
allow Internet access and email. In addition, new markets are opening to
wireless technology such as China, India and even Iran. According to
International Data Corp., the number of cellular phone and PC users is
expected to grow to 1.1 billion in 2003, from 303 million in 1998. Everyone wants cellular and wireless technology. So do we.
There are some very strong companies in
the wireless sector. Nokia (www.nokia.com), a Finnish-based company, is
the dominant supplier in the industry of telecommunication systems and
equipment with a market capitalization of 242,520.96 (mil). During 1999,
earnings rose 29.6%, operating profits grew 57%, and net sales were up
48%. During the first quarter of FY 2000, net income rose 55% and sales
climbed 69% (sales increased 88% in the mobile phone division), soundly
beating market expectations. Operating profit increased 57% in 1999, and
pretax profit increased 76% during the first quarter of FY 2000. Nokia's
operating profit margin increased to 20.1% from 19.8% a year ago. Net
sales for its mobile phone unit increased a whopping 61% in 1999. Nokia
expects to match or beat forecasted sales growth of 38% in FY 2000.
Nokia's top two markets are the United States and China. With continued
growth in markets sectors such as China, and being a leader in developing
"smart phones" and other telecommunication equipment/systems,
Nokia's future is bright.
In addition, Nokia maintains a
partnership with Palm and Interdigital Communications (IDC). If you own
a Palm Pilot you know they rock. Nokia's partnership agreement with Palm
will likely result in future cellular and smart phones that utilize the
Palm platform, meaning these phones will be more user friendly.
Cool.
IDC is providing support to Nokia in
developing third generation (3G) wireless technology called Broadband
Code Division Multiple AccessTM (B-CDMA). IDC's proprietary B-CDMA uses
a much larger bandwidth (typically 5 to 30 MHz) than the Narrowband CDMA
being developed by Qualcomm (1.23 MHz frequency). Broadband or Wideband
CDMA includes the ability to deal more effectively with (1) "multipath
fading," (2) compatibility with the digital system prevalent in
most of the world (TDMA/GSM), and (3) other advantages. My bet is on
Wideband CDMA such as B-CDMA. In fact, Nokia has gone as far as saying
that they will be the first company to deliver commercial Wideband CDMA
technology around the first half of 2001. I wouldn't bet against them: they were the first to deliver commercial GSM networks.
Another promising supplier of
telecommunication systems and equipment is Ericsson (www.ericsson.com).
Ericsson is a Swedish-based competitor to Nokia, with net sales
increasing 86% in 1999 and pre-tax profits increasing 366% in the first
quarter of 2000, shattering expectations. Consumer product sales
increased 53% in the first quarter of FY 2000. Earnings are expected to
increase 70% in FY 2000. Revenues are expected to increase 21% in FY
2000. Net income decreased 11% in 1999; however, with the release of a
CDMA-based cellular phone line in 2000, operating margins are expected to
increase 11%. Ericsson is one of the leaders in developing Wideband CDMA
technology (along with IDC) and, as a result, will likely be in a strong
position in the future with continued high revenue growth. Ericsson also
maintains a partnership with Palm. There is plenty of market share for
both Nokia and Ericsson to thrive in the future. Sooner or later, and my
bet is sooner, the market will rebound in a big way and these stocks
will lead the way.
Greed will once again drive the market up
- it always does. The Bulls have to make their money too. Ride the
wireless telecommunication wave. To find more information on wireless
technology and promising stocks in this industry, try the following web
site: www.telecomtechstocks.com.
The next New Age Investor column
will dive into the semiconductor industry and focus on semiconductor
suppliers to the wireless industry. Stay tuned.
(Disclaimer: The author owned shares of
Nokia at the time of this article's publication.)
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