For now, though, Feinberg would continue to avoid stocks such as Cisco and the personal-computer makers, other than Dell, and also shun semiconductor-equipment makers. In the Internet area, he picks eBay as the company with the best business model and prospects. Feinberg pays special attention to the stock of SONICblue, which makes a digital-music player but holds a position in United Microelectronics that's worth more than the price of SONICblue's stock itself now.
Although the economy has been holding up fairly well, Feinberg worries that unemployment might catch up with the consumer and be "the last shoe to drop" in the slowdown.
Feinberg, along with Orbitex technology portfolio manager Glen Frey, was a guest in a chat presented on Apr. 26 by BusinessWeek Online on America Online. These comments came from his answers to questions from the audience and from BW Online's Amey Stone. Edited excerpts from the chat follow. A a full transcript is available from BusinessWeek Online on AOL, keyword: BW Talk.
Q: Stocks seem to have stabilized lately. Do you think we've seen the worst of the selling?
A: Unfortunately, I still think that we need to go back and potentially retest the lows we saw the past few weeks. Typically, bear markets are not resolved by a simple 30% rebound in the marketplace, but rather are typically finished after one or more retests of the low price levels in order to form a basing pattern.
Q: Where do you see the economy and the markets going for the rest of the year and into 2002?
A: I think the economy will likely experience a recession in the coming two or three quarters. However, please keep in mind that recession is just a word. And whether the economy grows at 1% (which would keep us out of recession) or declines to less than 0% (which would put us into a recession, if it happened two quarters in a row) is really just semantics -- investors should be and will be focused on the rate of change rather than the absolute change. We expect the results of the current Fed easing and the associated liquidity to take effect either in late 2001 or early 2002.
Q: What are you recommending these days?
A: A small-cap name that I feel is an excellent value at these levels is SONICblue (SBLU
). Its main business consists of the Rio digital-music player, which is a portable device that plays downloaded music, in addition to Replay TV -- which functions as a digital VCR. We believe that these core businesses alone are worth over the current price of $4.50 a share. However, the bonus comes from their holding in United Microelectronics Corp. (UMC
), a foundry in Taiwan (for which they hold stock worth about $5 a share) that is similar to Micron Technologies (MU
). In essence, you're getting the core business for free and have a free option on UMC stock, which we believe can double from these levels.
Q: What sectors do you like for the next two years? Or are you more of a stock-picker?
A: Over the long term, we believe that technology will lead us out of the current bear market. Empirical evidence has shown that technology is a sector that tends to fare the best after a series of successive Fed cuts. The sell-off in technology was caused largely by the fact that capital spending dried up, which was a function of higher borrowing costs initiated by the Fed. We believe that as the situation reverses itself and the Fed eases liquidity back into the market, spending on telecom and equipment will improve.
Q: Any thoughts on the semiconductor-equipment makers and PDA [personal digital assistant] manufacturers?
A: We would avoid semi-equipment makers right now. We're seeing a drastic slowdown in their customers, namely the semiconductor companies.... PDAs are for the most part a commodity business. Palm (PALM
) is an obvious market-share leader, but we see competition increasing with the likes of Microsoft (MSFT
), Nokia (NOK
), and others. So we would mostly be avoiding that space as well.
Q: What do you see as the effect on the economy from high levels of announced layoffs?
A: It's probably the single most important thing that keeps me up at night. We've had a record decline on the Nasdaq, all the while with the consumer remaining relatively healthy and confident.... While the actual unemployment rate remains low by historical standards, the amount of money lost in the stock market in the past year, combined with increasing unemployment, may cause the first significantly sustained outflows from the mutual-fund market in the past decade. In summary, the demise of the consumer could be the last shoe to drop.
Q: What do you think of Cisco (CSCO
) and Oracle (ORCL
) at these prices for the long term -- two to three years out?
A: We would continue to avoid Cisco. The company is seeing increased competition, reduced pricing pressure, and reduced demand for their equipment. Long-term, we question their ability to expand into the optical-switching market. We prefer other companies in that sector, such as Juniper (JNPR
), for the long term. Oracle is going to continue to be a leader in the applications and database market. Over the next several years, their customers are going to continue to want integrated applications, and over that time period, Oracle will benefit from that demand.
Q: What's your view on the energy sector in general -- and on BP
[BP Amoco] in particular?
A: BP is one of a host of energy stocks that have been helped out by the rising price of oil. We've recently seen earnings reports from Chevron (CHV
) and Texaco (TX
) that surpassed expectations, reflecting a rise in crude oil up to a high of almost $32. BP will continue to benefit from the same trends and should show strong earnings as well when they report their first quarter.
Q: You said earlier that tech stocks usually lead us out of a bear market. What makes you so sure they aren't doing that right now? The Nasdaq had quite a run a week or so back.
A: One word: visibility. The companies that have reported have matched significantly reduced earnings expectations and have refused to give guidance beyond the next quarter. Any investor buying these sticks now is buying based on the hope that the second quarter will be the bottom. While we believe that to be a distinct possibility, we would rather be somewhat defensive until we can gain better visibility into the spending forecasts.
Q: What do you think of the biotech sector now going forward? Any biotech names you like better than others?
A: The biotech sector is of long-term interest to us. In the short term, we believe that it will trade largely in line with the Nasdaq, since biotech is one of the most speculative industries one can invest in. Longer-term, we believe many of these companies are in a position to grow into profitability and are not affected by the deteriorating fundamentals of the U.S. economy. Names such a Celera (CRA
), Vertex (VRTX
), and Titan Pharmaceuticals (TTP
) all have solid balance sheets, hoards of cash (raised when their stock prices were much higher), and most importantly, promising pipelines that can start delivering revenues as early as next year.
Q: What do you think of the PC industry in general and Microsoft in particular?
A: We see competition increasing in the PC industry, revenues slowing, and pricing falling dramatically.... The only company we like in that space is Dell (DELL
), which is gaining market share and has a low-cost business model.... Microsoft has a business that's still very reliant on the PC, but they are expanding into other areas, such as servers, PDAs, and next-generation video games. The company is generating a very large amount of cash, and once the government's lawsuit against them is resolved, they can once again make acquisitions and expand beyond the PC market. We would consider that a positive development for the company.
Q: There are conflicting reports on Internet companies. What do you think of Amazon (AMZN
) and eBay (EBAY
A: We like eBay...we feel that eBay has a business model that's perfect for the Net. They're growing, they're profitable, and they're not reliant on advertising, as are a lot of other Net companies. Most important, we feel their business model is sustainable long-term, and that they will be able to expand it into international markets as well. It's one of the few Net companies that we would consider buying. We see Amazon either merging or partnering more significantly with a traditional retailer. We do think their business model is also sustainable, but the economics of it is not as compelling as eBay's.
Q: Before we end, Neil, what is your best advice for investors in this market? To stay on the sidelines?
A: Any good investor should not be a market timer, and thus it is far more important to pick the right sectors and find good stocks within those sectors to make money in the long run. We believe that over the next 12 to 24 months, investing in a broad list of tech names will far outperform historical returns on equities. Investors may be best served by finding a good telecom/tech mutual fund that can hold its own in bad times and gain significant appreciation in good times.