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It may take years for technology stocks to catch fire again. The place to look for investment now is in what Peter S. Cohan, president of strategy consultants Peter S. Cohan & Assoc., calls the "W-petroleum complex." It's an allusion, of course, to President George W. Bush's energy policies -- and historically to Eisenhower's "military-industrial complex."
Cohan specifically recommends stocks in the integrated energy, gas exploration, offshore exploration, oil refining and marketing, oil services, utilities, and coal industries. He points out that one group of coal stocks went up 312% in price over the last year -- the kind of growth formerly associated with Internet issues.
Among coal companies, he points to Massey Energy and CONSOL Energy as good possibilities. But he hasn't completely turned his back on tech. He's enthusiastic about semiconductor-testing company Teradyne and also about Check Point Software. On the downside, he cites a number of reasons to worry about the future of erstwhile star Cisco.
Cohan made these comments and many more in an investing chat presented May 17 by BusinessWeek Online on America Online. He was responding to questions from the audience and from Jack Dierdorff and Amey Stone of BW Online. Following are edited excerpts from the chat. A full transcript is available on AOL at keyword: BW Talk.
Q: Peter, the question on everyone's lips the last two days is whether the bulls are running again. What do you think?
A: Well, I think the bulls are definitely running for stocks that are likely to benefit from cuts in interest rates...my concern is that tech stocks will only have a very long-term benefit from a cut in interest rates, not an immediate benefit.
Q: So it sounds like you are still a little bearish on tech stocks, right? Do you think earnings have bottomed?
A: I think that earnings have bottomed, perhaps, in the semiconductor-equipment area. But in other areas -- in particular, Internet infrastructure and e-commerce software -- I think that there is still a long way to go before revenue growth begins again. One area that I think has some really interesting promise is semiconductor testing, and there's a company I like there called Teradyne (TER
). What's interesting about that is that I actually recommended the stock last fall, when it was down at about 25, and it's now at about 43.
Q: After the earnings reports tonight from Palm (PALM
) and Dell (DELL
), do you think we are headed for another correction?
A: I think that you have to consider Dell and Palm in very separate ways. I think Dell is clearly a leader in its market, and it has got the financial strength to survive a downturn. But Palm is a different matter, because they seem to have been losing market share pretty dramatically, and there's a real danger in terms of slowing demand and increased competition in the future, which could put more downward pressure on that stock.
I think that investors in technology stocks need to accept the possibility that it could be many years before growth resumes at the pace that it was before. And I also think that investors need to learn a new industry -- or actually a cluster of new industries -- which are likely to continue to benefit from a new Administration in Washington.
Q: So what are those industries that will benefit from the Bush team?
A: They're a set of industries that I call the "W-petroleum complex," paying homage to Eisenhower's "military-industrial complex." Specifically, these industries include integrated energy, gas exploration, offshore exploration, oil refining and marketing, oil services, utilities, and coal. And I would just add that in the last year, of all those industries, the one that has seen the stock prices go up the most has been the coal industry...a subset of the largest coal companies saw their stock prices go up 312% in the last year, which is the numbers that we used to associate with Internet stocks.
Q: Can you give us any names you especially like in those areas?
A: Yes. Let me start off with coal. There's a company called Massey Energy (MEE
) -- its stock was up 171% last year. It had $8 billion in sales, and it's one of the largest coal producers in the country. And there's another one that I like, which appears to be rather cheap. It's called CONSOL Energy (CNX
), and it had $2 billion in sales in the last year, with a net profit margin of 8%. Its stock was up 253% in the last year, and it's trading at a relatively modest price-earnings ratio of 17.5.
Q: Back on tech, how do you like CHKP
(Check Point Software)?
A: I love that company! Actually, it was on my list of techs to recommend. And as Amey knows, I have been talking about this company for a long time -- I actually recommended it on CNBC in August, 1998, when it was trading at a split-adjusted $5. It's now trading at about $59. What I like about it is that it has been doubling its revenues, and it has a 55% net profit margin, which makes it one of the most profitable companies that I'm aware of.
Q: Peter, are there any of the battered tech giants -- names like Cisco (CSCO
), EMC (EMC
), or Sun Microsystems (SUNW
), to name a few -- that you recommend investors pick up now?
A: Of the names that you mentioned, I am most comfortable with EMC. And probably second most comfortable with Sun -- and I also think that Microsoft would be a good one. But I'm quite concerned about Cisco. I still feel that they are, to a certain extent, in a state of denial about what has happened. They've lost well over $350 billion in market capitalization in the last year, which has to be some kind of record.
And I'm really beginning to question whether the current management team is the right one to take the company forward, since I feel that they've made some huge blunders in the last couple of years -- in particular, trying to grow by selling to these competitive local exchange carriers, many of which are going bankrupt now. And also because, in the last two years, Cisco has left its core router business vulnerable to attack from Juniper Networks (JNPR
), which has taken 30% of the core router market in a very short period of time from Cisco.
Q: What's going on with Exodus Communications (EXDS
)? Many recommendations -- but CEO Ellen Hancock is selling 8 million shares.
A: Yeah, that is a really sad story. They basically leveraged up, borrowed a bunch of money to host dead dot-coms, and I guess it's a race in terms of their cash-burn rate -- can they generate enough positive cash flow to offset their cash-burn rate. And they had a first-quarter loss of $650 million; they're cutting their revenue projections; they're reducing their capital spending by $300 million; they fired their top three executives; and the stock is down 89% from its all-time high. It's just a sad story, but all too typical of companies that are doing hosting -- and also, frankly, similar to what happened to many of these competitive local exchange carriers in terms of taking on a lot of debt to build an infrastructure and then finding that the revenue wasn't there to cover the costs.
Q: What is your opinion of fiber optics -- and of FNSR
(Finisar)?
A: In general, there's some real concern I have about fiber optics, in terms of there being massive amounts of excess capacity. In fact, I saw a report that said that the utilization of fiber-optic capacity is at a shocking 2.5%, which is just incredibly low. What this means is that there has been tremendous overbuilding of fiber-optic networks. There was an awful lot of investment last year in fiber-optic-related networks, and now telecommunications capital spending is dropping at about a 30% rate, so a lot of the budget for buying optical equipment from companies like Finisar has plummeted. But having said that, Finisar does have one solid client, namely EMC, which accounts for 25% of its sales, so that is some good news for the company.
Q: What is your opinion of Tyco International (TYC
)? (It is on the BW cover this week.)
A: You know, Tyco International has been a phenomenal story -- it sort of reminds me of those 1960s conglomerates, where they would use stock to acquire unrelated businesses, and because they were able to grow their earnings, their stock remained valuable as a currency for acquiring other businesses. So it now controls over 200 businesses that it has acquired. And they've just made another acquisition -- it was announced yesterday -- of some kind of security-services firm. The stock has not really done that well, even though Dennis Kozlowski gets a lot of positive press -- like the cover of BusinessWeek. Over the last year, it's up about 3.6%, which is, you know, not that exciting. So for some reason, this guy Kozlowski seems to get a tremendous amount of positive press, and I'm not sure why, given the stock performance...it's not something that I would get that excited about buying.
Q: Peter, I know you are always on the lookout for "the next big thing" in technology. Have you found it yet?
A: Genomics is interesting because it's the intersection of a couple of different strains of science -- genetics and pharmaceuticals and high-powered information processing. So it sort of combines the smartest of all the smart people into one big, exciting new industry. Another thing that kind of got me interested in it is the fact that the retired chief technology officer of Microsoft, a guy named Nathan Myrhvold...is investing in this area. Finally, last week, the pharmaceutical giant Merck (MRK
) announced that it would pay $621 million for a company called Rosetta Inpharmatics (RSTA
), which is a genomics firm, and its stock price went up 74% on the announcement.
There are quite a few of these companies out there that could be worth looking at. Just to name a couple that I like, there's a company called Gene Logic (GLGC
), there's one called Human Genome Sciences (HGSI
), and there's another one called Myriad Genetics (MYGN
). I'm not necessarily recommending those firms as the best ones to look at, but I'm saying that those are the kind of firms that are worth investigating.
Q: Given that you think it will take a long time for tech stocks to recover, what strategy do you recommend for all those investors with lots of paper losses? Take their tax losses and switch into energy, perhaps?
A: Take their tax losses, hold on to the long-term winners like Microsoft, EMC, Check Point, then put a significant amount into a money-market fund, and then investigate these energy categories that I mentioned before. But definitely leave yourself a cushion in the money-market fund so that you can sleep at night. I mean, I think that there's going to continue to be opportunities in energy, but let's not kid ourselves about energy being a safe bet. It's a volatile area. I've lived through a couple of oil booms and busts, and actually, since the inception of the oil industry in the 1890s, the energy industry has been volatile.
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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