Many investors still refuse to accept the reality that the tech bubble has burst – and you can’t remake bubbles. Once burst, they are gone.
They seem to talk of three previous hero-stocks the most, Cisco (Nasdaq: CSCO), JDS-Uniphase (Nasdaq: JDSU), and Juniper Networks (Nasdaq: JNPR). In fact, CNBC seems to have a fixation on Cisco that just won’t go away.
Too many investors got caught up in the media mantra of old economy-new economy stocks when the fact is, there is no such animal. Either you can cut the mustard, or you can’t.
The stock market is, and will always be, about the future.
Yes, for a few years these stocks flew to the upside based on mounds of positive hype from the Wall Street touts. They promised these stocks would grow to the sky (“damn the earnings son, this is a heck of a good story!”).
We are now in the “hangover” phase, you know… reality.
Tech stocks are now judged by their earnings (the way they should be) and are now settling back to more realistic levels. But some still have a way to go before the bottom is in.
Investor hopes and Wall Street hype are recently trying to resurrect the hero stocks, but the reality of the markets is that investors have this nasty little habit of remembering just what they paid for these stocks.
There are legions of investors that still own these “underwater” stocks.
Every time these stocks mount a decent rally, sellers show up en masse. They are infected with a disease we call “getevenitis.”
Let’s look at three of these previous high-flyers and ponder their future.
Cisco currently sells in the $20 neighborhood. According to Zack’s consensus estimates for year 2002 earnings (ending July 2002), Cisco should earn in the area of $.29 a share.
That means if Cisco sells for 30 times next year’s earnings, the stock would sell in the $9 area (about a 50 percent drop from current levels).
Who cares about past years; the stock market is about the future. And what about the future of Cisco?
Cisco is in a very crowded arena where the competition is going to be very tough. As they all fight for market share, you can expect profit margins to suffer even more.
I think even next year’s earnings predictions for Cisco may be geared down further.
It is the same story at JDS-Uniphase. Consensus earnings estimates from Zack’s for JDSU in 2002 (ending June 2002) are $.22 a share. That means if we give JDSU a generous price earnings ratio of 30 times earnings, that would be about $6 a share (over a 60 percent drop from current levels).
One that the dreamers have latched onto recently is Juniper Networks. Wall Street analysts have not yet reached reality on this one. Zack’s consensus estimates for JNPR year 2002 (ending December 2002) are $1.18.
That is a ridiculous number in our opinion. I’ll be shocked if JNPR can earn more than half of that in 2002. The fact is that JNPR, too, is in a very competitive business, and margins here should start to drop by the third quarter of this year. That is about when you can expect the analysts to start shaving their earnings estimates for JNPR, with a further price decline to follow.
Many of you that are long these stocks hate to hear these things, but that’s the way I see it. On Wall Street, as you should well know by now, they will be only too happy to tell you just what you want to hear. So if you want a vacation from reality and soothing words, just listen to them.
The pain in the NASDAQ for the rest of this year should be primarily concentrated in the big-name tech heroes of yesteryear, such as the ones mentioned above.
These stocks were absurdly over-priced, and their days of walking on water are over. How many ways can I put it? The bloom is off the rose, the train has left the station – it’s over.
The hardest thing to do in the stock market is accept that we all make mistakes, and to do the right thing about that. I know, for unfortunately I, too, have been in “losing shoes” myself.
Conclusion: The difference between a successful investor and an unsuccessful investor is the ability to deal with mistakes and move on, but, if you can do this, you have taken a big step forward.
