Let’s Play The Sector Shuffle

Hewlett Packard purchased Compaq this morning
to create what will soon become the world’s largest manufacturer of computers
that break down a lot. Without a doubt, this should launch our friend, Jack
“In the Box” Baroudjian into a tirade of “BUY! BUY! BUY! BUY!”
this morning on bubblevision.

Remember, it was the Microsoft court decision
several weeks ago when Microsoft was trading $75 that, according to Jack’s
flawless judgement, would propel the Nasdaq on a prolonged rally. Well, that
didn’t exactly play out, and Microsoft lost nearly 17 points, or 20% of its value,
from that big cheerleading session. Heck, of course Jack’s reasoning was flawed,
and of course his call for the Nasdaq to rally on that event was as successful
as the mass rollout of DSL throughout the country, but don’t lose your
perspective: It made for one darn great morning of television — and that,
folks, is all that really matters.

OK, back to strategizing. Over the weekend I was reading a lot of value fund
managers writing about their evaluation criteria in choosing stocks for their
portfolios. One recurrent theme was their ability to identify stocks that were
“undervalued” or “underloved” by the public and Wall Street
and buying these stocks if they had positive underlying fundamentals and cash
flow. This seems reasonable, as we were all taught to buy low and sell high,

Well, digging a little deeper into the holdings in these portfolios
reveal a lot of mid-cap names that have seen share prices skyrocket over the
past 12-15 months, as well as primary, secondary and tertiary healthcare-related
stocks that have also seen their share prices grow by triple digits since the
technology sector has hit the skids. With the great majority of these stocks
trading at 300-700% above their historical valuations, are they still value
stocks? Or has Wall Street once again performed that magic in which they
carefully funnel public money into a handful of stocks that you MUST own and
said, “Hey. Don’t worry. They’re totally safe.”

Didn’t we see this
same type of thing in July, August and September of 2000 when, although the
Nasdaq was hitting the skids, stocks like Juniper Networks
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, Brocade
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and Ciena
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were all hitting all-time highs because Wall
Street coined them the “must-own-totally safe” tech stocks that would
never incur any type of earnings or growth downturn? One year later, we can see
how wrong they were. The funny thing is, Wall Street didn’t believe their own
hype — they used the funneling of money into JNPR and BRCD as an opportunity to
sell their holdings and, for many, to get short. Rest assured, John Doe who
lives at 1234 Main Street is the only guy who can’t find a chair once the music

So, this morning with (as Bill Fleckenstein calls her) the Queen bingo caller
singing the praises of Tenet Healthcare
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for yet another week and the
Nasdaq certainly looking as if a significant oversold bounce is somewhere in the
offering, we can’t help but wonder if THC (which is up nearly 500% in the past
12 months or so) is finally becoming one of those stocks that is perhaps too
OVERloved and OVERhyped, much as JNPR and BRCD were last summer.

If you wait
around long enough, we will probably witness a catastrophe in the sector that
will totally strike Wall Street by surprise (yeah, right), at which time the big
boys will shrug their shoulders and proclaim, “Well, we are taking profits
in the sector, but we believe in the long-term success and growth in the
healthcare industry.” That will be very reassuring to the millions who
are buying at these lofty prices.