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Cisco Systems has been "dead money" since March. JDS Uniphase's best days are behind it. And America Online's merger with Time Warner is an ego trip for Steve Case.
Those are among the outspoken opinions of technology strategist Peter S. Cohan, president of Peter S. Cohan & Associates, whose stock-picking skills have put him on the list of "top tippers." Despite his negative views of some prominent technology names, he sees that area as the place to be for investors with a long time horizon. But he cautions that they still must be very picky about the stocks selected.
Cohan's comments came in a chat presented on Nov. 2 on America Online by Business Week Online. He was responding to questions from the online audience and from BW Online's Jack Dierdorff and Amey Stone. Edited excerpts from the chat follow (for a full transcript on AOL, go to keyword: BW Talk).
Q: "Mixed" was the adjective applied to the market today, but it could apply to many aspects of the market recently. How do you view the future?
A: There has been a big change in the attitude of investors toward the market, from a broad-brush approach...to a market where people are beginning to analyze individual industries and companies within those industries.... The future is going to be [about] picking the right industry sectors and the right companies within them.
There are a couple of areas where there's going to be potential. One is Internet security. That area should grow rapidly and will continue to be in high demand. The leader in that industry is CheckPoint Software (
CHKP
). Another area with great potential: B2B e-commerce. Although there will be quite a bit of consolidation in that market, there are some clear leaders that have emerged already, such as Ariba (
ARBA
). I own shares of Ariba.
Q: Do you still think technology should be most investors' focus, or is it time to...look for value in other sectors?
A: I think the answer depends a lot on the investor. If you're about to retire, then you'll have a different perspective on technology than if you're in your early 20s. If you're about to retire, I'd think about limiting the number of tech stocks that I own and probably diversify into other investments such as bonds and maybe some equity index funds. If you're in your 20s, you can afford to take more risk and focus more of your portfolio in the technology area.
Q: How will large-cap techs do in the rest of 2000 and 2001?
A: I think that large-cap techs will be valued-based on their earnings and growth potential during that time on a company-by-company basis. For example, today Intel (
INTC
) announced that they had good prospects for 2001, and if they keep meeting those expectations in the next quarter, for example, then the stock will keep going up. But if they miss a quarter, their credibility will be shot.... Another example of a company that will probably continue to do well is EMC (
EMC
), which has maintained a very strong track record of revenue and earnings growth and will likely continue to go up in value. That's probably a safer bet than Intel among the large-cap techs.
Q: Do you think it's wise to hold and hope for JDS Uniphase if you bought it at 95?
A: JDSU (
JDSU
) is a company that I'm afraid has its best days probably behind it. It's losing money and has an acquisition of SDLI (
SDLI
) that hasn't been completed and will need to be digested. My concern is that the stock is priced for perfection, and it will be hard to deliver on that perfection. So it might be better to take the loss now.
Q: You like B2B -- how about e-tailing?
A: I have felt for several years that online retailing...is a very bad business to be in...because most of these industries are very low-margin businesses offline and putting their business on the Internet adds a lot of costs.... Even as pricing is driven down, there's no possibility of recouping the additional costs by higher pricing -- overall, a recipe for business disaster.
Q: Health care is a favorite sector for many now -- do you have any favorites there?
A: ...I've analyzed that whole area, and [I think] Cigna (
CI
) is consistently well-managed. Aetna (
AET
) is sort of a blip: It had a better-than-expected quarter, but it isn't as strong as Cigna.
Q: Your stock-picking skill has been widely acclaimed. To what do you attribute your success as a tipper?
A: What it boils down to is that I have a lot of experience analyzing industries and companies. I learned how to do this at the feet of the master, Professor Michael Porter of Harvard Business School. I think that the ability to analyze industries and companies will become more important for picking winning stocks in the future. My book Net Profit details my stock-picking techniques.
Q: What do you think about AOL (
AOL
) and the Time Warner (
TWX
) deal?
A: I think it will be very difficult for the combined companies to generate a high return on the investment. I'd also add that the deal was done mostly for ego purposes on the part of Steve Case. I have a lot of respect for Bob Pittman and think that if anyone can figure out how to get a return, it will be him. But I'm skeptical that it will create a high payoff.
Q: A tech highflier we haven't discussed -- what do you feel about Cisco (
CSCO
) now?
A: Cisco has been dead money since March. Although I have a great deal of respect for the company and its management, I'm afraid that if you've held it for a long time, now would be a good time to sell. There are other companies doing better than Cisco in its market, such as Juniper Networks (
JNPR
), which has gone from zero to a 22% share of Cisco's core router market in the last two years.
Q: There's a new trend in Internet technology -- Internet telephony. Both Yahoo! (
YHOO
) and AOL have recently launched voice-over-Internet services. Any investment opportunities there?
A: ...The big problem is making the technology of voice-over-IP work as well as voice over a traditional phone system. And so far, nobody has really solved the problem, and that limits the potential market size. Having said that, there are a couple of companies in this area, such as IDT Corp. (
IDTC
), which owns a big stake in a company called Net2Phone (
NTOP
). These are among the companies that may be able to crack the technology problem.
Q: The financial sector is now favored by some -- what are the best ones to own?
A: Citigroup (
C
) is a very strong company. It's trading below its high. Another I think is strong is FleetBoston Financial (
FBF
). Fleet is well-managed and will grow through acquisitions.
Q: Is fiber optics dead or just a sleeping giant?
A: Fiber optics is a dangerous place for investors. But if you do your homework carefully, you can pick the ones that will sustain high growth. I'm kind of partial to Sycamore Networks (
SCMR
). It's trading at a relatively low price right now.
Q: Thoughts on the Baby Bell stocks? And on AT&T (), with its latest self-mutilation?
A: AT&T -- I pity anyone who owns the stock. I wouldn't hold on to it any longer if you do. The Baby Bells in general are likely to be the winners.
Q: Summing up, what are your favorite sectors now and favorite stocks?
A: My five favorite stocks: CheckPoint, EMC, Ariba, Macromedia (
MACR
) (which I own), and Sapient (
SAPE
). The sectors that those stocks are in are good, although I want to stress that those companies are leaders in their sectors, and it's important to buy leaders. The sectors: Internet security, storage, B2B e-commerce, Web tools, and Web consulting.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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