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Basham expects a recovery in the fall, especially if the Federal Reserve signals that it has finished raising interest rates. In the area of small-cap and mid-cap stocks, he suggests looking for emerging growth companies that have an ample supply of cash to meet their business plan and thus will not need to seek capital. Basham was the guest in a May 16 chat on America Online co-hosted by Business Week Online and S&P Personal Wealth. The following are edited excerpts of his responses to questions from BW Online's Jack Dierdorff, the moderator, and from the online audience. For a full transcript on AOL, go to keyword: BW Talk. Q: Mark, the Fed did exactly what everyone predicted -- raised interest rates half a percentage point. Do you see that affecting the market? A: I think the more important thing is expectations for future increases. Right now it appears that markets are expecting at least 50 basis points more increase by Labor Day. So if we see signs of dramatic slowing in the economy in the next two months, the market could have a very sharp summer rally in anticipation that the Fed will be finished raising interest rates. Q: You've described the IPO market as moribund. Are there chances for a revival? A: We are coming into a seasonally slow period, so it is going to be an unusually slow summer, even taking into account the typical seasonality. But if the Nasdaq starts perking up, we could have a rebound in the IPO market by Labor Day as well. Q: Do you think the Nasdaq will perk up soon? A: I think the Nasdaq is forming a strong base from which to rally. The rally will really get going when the market feels that we are close to the last interest-rate increase from the Fed. Q: You also cover small- and mid-cap stocks, some of them recent IPOs themselves. How are they doing? A: The emerging-growth stocks that I am recommending have been sold off along with almost every other technology and emerging-growth-type stock. However, I haven't really changed my outlook at all on the prospects for these companies. It has become more important to invest in stocks of companies that have sufficient capital on hand to carry out their business plan... Q: Can you name any of those companies? A: One company that I like very much, even though it is down sharply, is called Digital Island [ISLD]. It...doesn't have current earnings. But...Digital Island does have over $700 million in cash on hand, so they won't be needing to raise any capital anytime soon. I believe they will become profitable well before they do need anymore cash. Another company in the same boat is called Webvan Group [WBVN]. This company, again, is a small company without current earnings, but it has over $600 million in cash... Q: Any other good buys in those small- and mid-caps? A: A couple more companies that I like very much right now include Extreme Networks [EXTR], which is a real up-and-comer in the field of gigabyte Ethernet switching. Another company that I like very much right now is Intermedia Communications [ICIX], which is one of the largest data communications carriers in the country. Q: What are you forecasting for small- and mid-caps vs. large caps? A: Over the last 12 months, the S&P small-cap and mid-cap indexes have outperformed the S&P 500. So they are outperforming already, despite the big drop that we have had in the last six weeks or so, and I think they will continue to do so over the next 12 months. Q: We've recently had a big-name IPO -- AT&T Wireless [AWE] -- and it hasn't burned up the track. Why? A: The market really hasn't been all that favorable since they went public on Apr. 26. We have initiated coverage of AT&T Wireless with a buy recommendation. AT&T Wireless generates strong cash flow of about $2 billion this year and an anticipated $3 billion next year. Wireless phone penetration in the U.S., at around 30%, is only half that of some European countries...so we have very high expectations for continued growth for AT&T Wireless. Q: Mark, do you have any rule of thumb for how long an average investor should wait these days before buying a new issue? I note S&P is already recommending AWE. A: I am usually very selective in regards to what IPO you should buy, whether we are in an up or down market. For the few that I recommend, it doesn't matter if you get in right at the beginning or if you prefer to wait and let the stock settle down. Q: How can an average person get involved with more IPOs? Is it wise to do so at this point anyway? A: Typically, we would not recommend a buy-and-hold strategy for almost all IPOs. For the few that we do like, generally you can get in at the offering or just after it goes public and starts trading, and if you are a long-term investor, you will likely end up making money. So the timing right now is not the best, but that doesn't really change our view. Q: What do you think the next big IPO will be? A: One we like very much is called ONI Systems. It is involved with high-bandwidth communications networking. The area that they are particularly involved with is optical communications, which is a very hot area. Q: A guest last week predicted that tech and Net stocks are likely to come back in the third quarter. Do you agree? A: I would concur. I think, generally across the board, technology and Internet stocks have been oversold, and they are undervalued, generally speaking. Q: Was 1999 -- and all its dot-com IPOs, etc. -- an exception to IPO patterns? Perhaps we shouldn't take it as an example and expect the same in the future. A: I would hope that we wouldn't have that same kind of market euphoria. It creates more confusion than it provides clarity about which companies are fundamentally the strongest...The flip side to 1999 is what we are going through right now...a lot of these stocks are trading at a tenth of what they were... Q: Earlier you hinted that fall might be a time for these numerous postponed IPOs to come off hold and into the market. Do you expect a flood, or just a gradual trickle? A: I would expect -- and I actually hope -- that it will be a gradual trickle. The reason is that I prefer there to be a nice healthy balance between supply and demand of IPOs. Right now there are too many IPOs. Last year we had too much demand. I prefer a balance. Edited by Jack Dierdorff |
