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Message subject : Act Now to Beat the Street

This message was posted by Michael Murphy on January 12, 2001 :

By Michael Murphy
Editor, Technology Investing
January 12, 2001

Well, it’s official. Last year was a crummy year for the market -- the crummiest, in fact, with NASDAQ down 39.2% (its worst year ever). Analysts are declaring a tech slowdown and investors -- maybe you -- are scared. One thing I’ve learned in my 30 years of analyzing technology companies, however, is that Wall Street has a manic-depressive attitude towards these stocks. The best way to play this game and make a hefty profit is to uncover the facts and act on them before the mood shifts. Let me explain.

The psychology towards technology stocks reminds me of how negative Wall Street was on tech in early 1999, after the Long Term Capital hedge fund implosion and the resulting stock market declines. As late in the year as May, many analysts and reporters were convinced that personal computer sales were weak, semiconductors were headed down and digital cellular technology was stalled. I thought they were dead wrong. In hindsight we know that 1999 was a great year, with technology growing 25% and the NASDAQ soaring to record levels. My Technology Investing subscribers and I saw our investments surge 157%!

As Yogi Berra might say, now it’s déjà vu all over again. Analysts are currently falling over themselves to cut earnings estimates and proclaim the death of the PC, an imminent downturn in semiconductor sales, a collapse in orders for chip-making equipment, too much inventory at telecom equipment producers and who knows what else. Any analyst who puts a buy recommendation on a technology stock is greeted with a chant of "You just don’t get it!" from the rest of Wall Street and the media -- the same mindless drivel they were chanting at me (literally) last spring when I said the Internet retailers were unlikely to ever make any money. On the flip side, any analyst who cuts technology earnings estimates or makes a sell recommendation brings in tons of sell orders for his firm, books megabucks in transaction commissions and pays for all those Christmas bills that have started to roll in. Guess which way analysts are leaning now?

But just as in late 1998/early 1999, this, too, shall pass. Yes, some companies have announced flat sales for the December quarter because they reduced inventories (this is a short-term adjustment) based on fears of a slowdown. But contrary to what you’re hearing, technology is still growing rapidly. No, it won’t grow as fast as it has -- no one who’s been plugged into the industry ever thought it would. But it will, at the very least, settle into a comfortably rapid clip.

It’s important to remember here that technology is not economically sensitive -- it is driven by product cycles. What that means is that a good economy does not guarantee strong technology sales, and vice versa. For example, in 1994 Microsoft delayed the introduction of its new Windows package (the subsequent Windows 95), and, as a result, PC sales were down even though the economy was good. Likewise, during the Asian Flu of 1997, the full-featured multimedia PC for $999 was introduced, and PC sales took off.

The product cycles for all the major tech industries in 2001 are strong, which spells good news for tech investors. Consider:

*Windows 2000 will be widely adopted by corporations
*the new Intel Itanium chip will drive a round of server upgrades
*semiconductor producers will accelerate their move to copper circuit lines and 12" wafers
*digital cell phones (especially Internet-ready) will continue to catch on all over the world
*major corporations are moving from client/server computing to Internet computing
*the Internet buildout continues at a rapid clip to keep up with exploding usage
*digital consumer products keep moving down the price curve, becoming more affordable

Overall, my research in the U.S. and abroad for computing points to personal computer hardware and software growth of 16% in 2001; servers and workstations should grow 13%, and mainframes will grow 5%. Enterprise software should grow over 20%. In communications, I look for overall market growth of about 15%, but anything related to fiber optics, wireless or broadband access will grow 25%. Cell phone handsets and systems will be up more than 25%. Internet usage will more than triple while the number of people connected increases about 25%. E-commerce should grow 60% to 100%. In this environment, semiconductor revenues will rise about 25%, and shipments of semiconductor equipment will also be up about 25%.

That’s a lot of numbers, but you get the idea -- growth will be very strong. That’s not what you’re hearing in the media, which means there’s a lot of opportunity to buy beaten-down tech leaders. You want to act on the facts now before Wall Street catches on, or you’ll be kicking yourself when the market takes off without you.

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