"A Lost Decade" for Tech Growth


"Until I see some kind of powerful trend one way or the other, I'm not comfortable saying that somebody should go put money into an individual stock." That's the cautious opinion of Peter Cohan, market expert, author, and president of Peter S. Cohan & Associates. He himself has the bulk of his investments in money-market and index funds.

Cohan likes investing in technology but feels that "technology hasn't been good for the last five years." He notes tech cycles running in decades -- in the 1960s the mainframe, in the 1970s the minicomputer, in the 1980s the PC, in the 1990s the Internet, and, in his view, so far in the current decade, "nothing."

His market view also includes worries about the impact on consumers of energy prices and a slowing in the housing market. He admires Ben Bernanke, the nominee to replace Alan Greenspan as chairman of the Federal Reserve, for his academic prowess but observes that his skill in dealing with a financial crisis has yet to be tested, as has his political savvy.

These were some of the points Cohan made in an investing chat presented Nov. 10 by BusinessWeek Online, in response to questions from BW Online's Jack Dierdorff and Karyn McCormack. Edited excerpts follow.

Peter, what's your latest view of the market, which did pretty well today?

Well, it's interesting to me that the strong areas in the market over the last five years had a little bit of a reversal in the last month or so -- namely energy and housing stocks. I think for a couple of weeks the market looked like it didn't really know where to go, so I was pleasantly surprised to see the market action today.

I'm not sure if it's sustainable or a one-day thing. It may be an ongoing trend that stocks not in the energy industry will continue to do well as oil prices decline, which would make sense.... Over the last few years, the market has gone in the reverse direction of the price of oil, and oil peaked at $74 after Katrina. I'm hoping that the price of oil will go down, barring any supply shocks, and that that will reverse the economy's recent slowdown.

So are you worried about the consumer and spending habits, given the high oil prices?

I'm definitely concerned that things are slowing down with the consumer. I think you can see that holiday advertising and discounts are already starting now, which tells me that they're already worried about the squeeze caused by high gasoline and heating-oil prices. In a way, the warmer than usual weather has caused a respite in the Northeast, but if the weather gets colder, people will be paying more for their heating than before, and that will cause problems. You can do without an extra box of candy, but certainly not heat.

Another concern is the turning housing market. I've been talking about the growing bubble in the housing market over the last few years, and I've been consistently wrong early, but I'm seeing more evidence than ever that the market's slowing down. I would be very, very surprised if, a year from now, housing prices will have gone up.

Now whether this means that people will start defaulting on their mortgages and the like, I don't know. But what the Fed giveth, the Fed can taketh away. Mortgages are at a two-year high, and they're becoming increasingly unaffordable, given these high housing values, and income is certainly not keeping up.

Are you shifting your portfolio around these days? If so, which stocks do you like?

The short answer is no, I'm not shifting it around. Basically, I haven't seen any individual stocks that I like for about six years or so. I was watching the energy stocks -- I did develop an energy/defense/media index that went up about 150% in the last few years -- but never invested in the stocks because I didn't feel comfortable with the companies.

Basically, I like investing in technology, and technology hasn't been good for the last five years. The Nasdaq is still down from its high and really hasn't done much. Basically, what I've done is, I have a lot of money in a money-market fund that has done very well since the Fed has been raising rates and a bunch of money in an index fund. I have some individual stocks from my private-equity ventures that have gone public, and I continue to hold on to those.

If I would make a move, I would be waiting for a new wave of technology growth, which I don't see. I did a study looking for the next big thing in information technology -- there's about a decade-long cycle. In the '60s, it was the mainframe, in the '70s the minicomputer, in the '80s the PC, in the '90s the Internet, and in the current decade, there's nothing. It's a lost decade, so there's nothing really that exciting to invest in right now.

If you don't see any individual stocks to like, what would you suggest the average investor do? Follow your money-market-fund example?

Yeah, money-market fund, and I would probably say index fund. I like the idea of the index fund because it's really hard for a mutual-fund manager to beat the market, and I also think that these index funds have relatively low costs, which means you can easily capture the upside on these funds.

There are individual stocks I've been following that have done well this year: Whole Foods Market (WFMI), Google (GOOG), Genentech (DNA), etc. They've done well, but something can happen. Whole Foods came out with an announcement of a stock split, so it has done well, but it could tumble a little bit. Genentech, in the drug industry, could be flying high but could tumble quickly based on, say, bad news from the FDA.... Until I see some kind of powerful trend one way or the other, I'm not comfortable saying that somebody should go put money into an individual stock.

What about the field of health care? Broadly speaking, Genentech is there, but also a lot of big names that some analysts like.

Express Scripts (ESRX) has done quite well, to name one. I recommended it in my newsletter, and it seems to have done quite nicely. It's a pharmacy-benefit management company.

WellPoint (WLP), an HMO, has done quite well. UnitedHealth Group (UNH) is another good one. So there are a few good stocks in this area. You could argue that the aging of the baby boom means that a lot more people will need the health-care system in the coming years, so it's almost a no-brainer that there will be money flowing in.

What do you think of Ben Bernanke as the new Fed chairman? His confirmation hearings are coming next week.

I think that's a big interesting uncertainty out there. I like the fact that he's really very bright academically -- I obviously find that very appealing. I think that, unlike Greenspan, he doesn't have much real-world experience. Greenspan had this big network of individuals that let him explore what was going on in the economy. He could improvise and think quickly on his feet, as in the crash in '87 and the other various crises he had to deal with.

What will be interesting to see is how Bernanke will relate to similar crises -- and they will arise. One of the things about Greenspan is...that he was able to sustain his good reputation for so long. The market will remain uncertain on Bernanke until he's tested. After the crash of '87, Greenspan kept things from falling apart, and that initial test helped him build a reputation. So this big unknown, this lack of real-world experience, is a big question mark.

Another question is: How good a politician is he? Greenspan was excellent -- he was effective under both parties, under very different Administrations. So those factors mean we need to discover how good [Bernanke] is. But he certainly is bright, with excellent academic credentials. He should also be similarly focused on keeping inflation down, but to me that's pretty much a prerequisite, a bare minimum for being in the Fed.

What's your take on the financial sector now? Any money in money stocks?

I guess one of the things I find interesting is that there are some property and casualty companies -- the ones that were exposed to these hurricanes -- that could do quite well in the future. They pay out all these losses to the insured people but can raise their rates tremendously. They go to the state insurance boards and say: Look, our costs went up, so we need to raise our rates.

I did some work with the ISO [Insurance Services Organization], based in New Jersey, and we did some analysis of the insurance industry. After 9/11, companies raised rates and made a tremendous amount of money. People assume that these payouts mean the companies will take a big hit, so they don't want to invest, but it might be an area to look.

I'm concerned about anybody with exposure to consumer finance or mortgages, people exposed to payday financing -- there will be a lot of defaults in that area. As interest rates rise, there will be more and more defaulting on credit-card and mortgage debt. So anybody in that field will suffer in the next year or two.

Do you have any thoughts on how big companies can stay innovative and flexible? Business history is littered with corpses -- railroads, big steel, and perhaps now Detroit is close.

Yeah, actually I've written a book on that, called The Technology Leaders. It came out in 1997 -- it was a study of 1,300 large companies in technology-based industries, including pharmaceuticals, semiconductors, etc. I focused on 20 companies that were the top performers in five-year average profitability and had the best reputation for products and services.

These companies have organizational habits that allow them to innovate. Those sources of advantage are entrepreneurial leadership, open technology, boundaryless product development, and disciplined resource allocations. I found the companies that followed these principles did better and were better at growing.

One that follows these principles now is Genentech. On my blog, I have a blog entry called "Genentech's 18,000% solution," and I describe how Genentech uses these four sources of advantage. And my Web site is http://petercohan.com.


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