Champs And Chumps

March 3, 2001
Dan Delaney

You’ve got to
give the market credit over the past year or so for letting everyone
feel like a champ at one extreme and a chump at the other. As we all know, last
year chumps became champs, and champs became chumps. Whether you were bullish or
bearish, pro-Net stocks or anti-Net stocks, value or growth, you likely felt
like an absolute genius at one point or another during the wild ride of
1999-2000. Your point of genius likely coincided with the other camp’s low point
of chumpness. While the painful and agonizing bear market in tech continues
leaving most techies feeling awful, it sure must be sweet revenge for the value
crowd that was laughed at in the early part of 2000.Â

The top of the ridicule list at this
time last year was the Oracle of Omaha himself, Warren Buffett. Despite having a
close friendship with Bill Gates, Buffett refused to invest in anything remotely
having to do with tech. It was no coincidence then, that the same day that
Buffett’s Berkshire Hathaway hit a multi-year low, the Nasdaq hit its all time
high. Berkshire bottomed at 40,800 on March 10 just as the Nasdaq peaked at
5132.52.

A year later the Nasdaq sits nearly
60% below its peak while Berkshire Hathaway has gained a solid 76% from its
March 10 low. On Friday Berkshire finished the day down 500 at 69,500. So what
does Berkshire have to do with tech? I mention it just to show that tremendous
opportunities can arise in the market at these types of wild extremes (as well
as remind you to never laugh at Warren Buffett or Berkshire Hathaway).

With the Nasdaq at a multi-year low,
it makes sense to start wading back into some of the techs that are at some now
amazingly low levels. Sure, this could be a multi-year bear market, and yes some
techs are still crazily over-valued, but it just feels like we are at one of those
extreme moments in technology valuation.

Take a look at the charts below. At
its Thursday low, the Nasdaq was nearly 38% below its 200-day moving average
which was as far below its 200-day moving average as the Nasdaq was above its
200-day moving average at its peak last year.Â

At it’s March 2000 high, the Nasdaq
was nearly 38% above its 200-day moving average at what turned out to be an
extremely unsustainable level. So are we seeing a potentially profitable
opposite extreme right now? After a 60% decline from the March 2000 highs, most
tech fans definitely hope so. If the Nasdaq can just regress back to the
average, it would make for a 51% gain.

As techs soared last year, many
analysts said time and time again that they were priced for perfection. They
were. A combination of a tough Federal Reserve, a torpedoed Microsoft, and a
collapse of the dot.com bubble combined to tank the market, which in turn ground
the economy to a halt. We went from 5% growth to 1% growth in two quarters, and
obviously that was not the “perfection” stocks were priced for.

So now it’s no wonder that every tech
company is warning of earnings shortfalls and laying off workers. With the Fed
continuing to drag its feet on rates, this anemic 1% growth rate could easily
get worse before it gets better. The fear of a worsening economy helps explain
why tech has gotten slaughtered. The anxiety level regarding the Fed and the
economy has created a negative mood as bad to the downside as the enthusiasm and
craziness was to the upside.

With the Nasdaq looking like a nuclear
bomb went off in the middle of it, there is a lot of carnage. Tech longs are
shell-shocked and new buyers are wary, and it just feels like it’s going to take
a lot of time for the smoke to clear. What do look somewhat reasonable now,
though, are some of the big blue-chip techs. At their current levels, it’s
getting pretty hard to make the case that the “tried-and-trues” like
Intel, Oracle, Sun Micro, Microsoft or even Cisco are over-priced at these
levels. It’s some of the recent high-flyers and recent IPOs that are really
tough to like right now.

Despite PMC Sierra’s
(
PMCS |
Quote |
Chart |
News |
PowerRating) fall
during the last 12 months from 255 1/2 to 39, it still has a PE of 95! Is PMC
Sierra worth this right now? I have no idea, and I doubt any of those
analysts that had “strong buys” on it at 255 1/2 do either. PMC is one
of those newer high-end semiconductor companies that everyone bought last year
because analysts loved them, but for right now, that whole networking sector
remains stuck in the land of pain and confusion. It will take quite a while for
that group to sort itself out and for new leaders to emerge.

The best case I can make for techs
right now is to look at them from a Buffet-style value standpoint. Obviously
earnings matter again (bye bye Internet valuation metrics!), and so should a
company’s market dominance. This makes the case for the blue-chip techs I
mentioned above because they not only have market dominance in their respective
niches, but they also have very reasonable PEs again. I’m even talking PEs that
Buffett might look take a look at if he were willing to invest in technology
rather than candy stores, Dairy Queens, or insurance companies.

While tech remains under siege, a time
will come when the buyers return, and the first buys will be in the companies
that have attractive valuations, low PEs, and market dominance. Whether
institutional buyers or individual investors, the first wave to come in will
come after the companies they understand and are familiar with. The institutions
are probably already loading up on the stocks that all of their genius analysts
are finally downgrading after 50% to 80% declines.

So here we are at yet another extreme
in technology. While its impossible to pick bottoms, there sure are a lot of
things that feel like a bottom. Now that we’ve felt what the ’73-’74 bear market
was like what’s next? The only thing worse could be a 1930s-style collapse–but
we don’t have to worry about that because that was caused by a stubborn Fed that
wouldn’t cut interest rates until it was too late. And we know that we can trust
our beloved……Wait a minute!! Get Greenie on the phone!! Fast!!

Dan Delaney

Champs And Chumps

BUY THE FEAR, SELL THE GREED

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