From: Adam Rifkin (adam@KnowNow.com)
Date: Wed Oct 11 2000 - 08:25:49 PDT
Gotta love history. Can't fight that reversion to the mean, can we?
Then again, Cisco and Oracle are "only" 40% off their highs. I'd wager
that your average Microsoft, Intel, Dell, Apple, Nokia, Qualcomm, JDS
Uniphase, Worldcom, AT&T, Lucent, or Internet stock holder would *love*
to be only 40% off their high...
Can Sun, EMC dodge the downturn?
Two tech giants are down and there may be two to go
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 12:14 AM ET Oct 11, 2000 NewsWatch
SAN FRANCISCO (CBS.MW) -- First it was Cisco, then Oracle. Could the
mighty Sun Microsystems and infallible EMC be the next of the e-business
technology giants to have their stocks lopped?
Making money was simple in the good ol' days of the New Economy: Invest
in Cisco, Oracle, Sun, and EMC, and kick up your feet.
With each of the stocks gaining eleven-fold over the past five years -
and all more than five-fold in the past three - it's no wonder the
stocks became darlings of Wall Street. Cisco, Oracle, Sun, and EMC
rewarded investors handsomely by excelling at basic tenets of e-business
-- respectively, networking gear, software, server computers and storage.
But this year, it became clear that the highly valued stocks are in no
way impregnable. New economy or not, drops in Cisco and Oracle shares of
roughly 40 percent each from their year highs proved that the so-called
four superstocks can't rise in a straight line forever.
As the entire tech market remains under pressure in October, some market
pros are starting to wonder if there are two superstocks down, and two
to go. Regardless of Sun and EMC's performance, market strategists are
staring to think the shares are poised for a fall, due to market
conditions and the stocks' valuations.
"The only stalwarts that haven't corrected are Sun and EMC," said Alan
Skrainka, chief market strategist at Edward Jones. "They will. This has
everything to do with valuation and the ridiculously high prices that
people are paying for these stocks."
Bernie Schaeffer of Shaeffer's Investment Research adds that the market is
bound to take a bigger chunk out of Sun and EMC before the Nasdaq finds a bottom.
"I would consider those stocks to be vulnerable," he said. "The modus
operandi of this market is to have the leaders hang and hang until they
can't hang anymore. Then they take the hit."
Leaders Cisco and Oracle already have been knocked off significantly from
their 52-week highs. Cisco's was first to go. It took more than a 30
percent dive in April and May. An article in Barron's that questioned the
company's acquisition strategy and its accounting methods helped to spur
valuation-driven selling. The stock remains off nearly 40 percent from its
Next was Oracle. Its stock is down about 40 percent peak-to-trough since
Sept. 1, mostly on valuation concerns. Analysts downgraded shares of the
stock saying growth prospects didn't justify the share price. It didn't
matter much that Oracle's net income growth of 111 percent in the August
quarter bulldozed Wall Street estimates.
Some feel that a grim fait also awaits Sun and EMC investors. So far,
both remain relatively unscathed by the market's tumult thanks to nearly
flawless execution. Sun's dropped only 19 percent since early September:
EMC's down about 10 percent in the same timeframe.
Execution, however, might not be able to save these stocks, so long as
the market continues its bearish ways. What goes up must eventually come
down. And for some strategists, Sun and EMC still haven't come down enough.
Sun and EMC boast expensive P/Es
Sun's price-to-earnings ratio sits at about 100; EMC's is 132. The
big-cap stocks are arguably expensive in a healthy market, according to
Skrainka. He notes that buying every stock in the past 28 years with a
PE of 100 or more and holding it for five years only nets investors a 2
percent return a year.
It's the unhealthy market that makes Sun and EMC all the more expensive,
Skrainka says. There's a valuation gap when the stocks still carry a
high PE while other tech heavyweights suffer at the hands of financial
warnings from Lucent, Dell, Intel, and others. Even pricey Oracle and
Cisco now are below a 100 price-to-earnings ratio.
Skrainka says that EMC, in particular, is due for a fall. At its current
valuation, he calculates that it will have to increase revenue 55
percent to 60 percent for the next five years.
"We don't know of any established company that can sustain 55 percent
growth long-term," he said.
To be sure, there are virtually no fundamental reasons why either Sun or
EMC shares are headed down. And it should be argued that there are good
reasons why their shares have held their ground better than competitors.
Both are in fast-growing parts of the technology industry that aren't
threatened by perceived demand problems plaguing Intel, Dell and the
rest of the personal computer market.
Both face stiffer competition - Sun from IBM and Hewlett-Packard, among
others, and EMC from feisty companies including StorageTek. But each has
fended off the competition by continually rolling out new products for
which customers clamor.
Earnings for each company are anticlimactic. Sun and EMC consistently
beat analyst's revenue and earnings forecasts. Both are expected to do
the same when they each report Oct. 18.
It's almost not worth mentioning the obvious: That Sun and EMC shares
could falter on any earnings glitch.
"There's nothing magic about Sun or EMC," said Bruce Lupatkin, general
partner with North Bay Technology Partners. "For any of these companies
with high valuations, the market is very unforgiving about any kind of a
More to the point, without any fundamental troubles, valuation worries
following earnings could send the stocks lower - some say by another 10
percent or more.
"The reason stocks get hit so hard is that so many people are hanging in
there for the earnings," Schaeffer said. "But the way this market has
reacted to tech earnings, it would not shock me for these stocks not to
react positively to the numbers. And that's going to bring the sellers
out of the woodwork."
The new toilets are here, the new toilets are here!
Something that perhaps you didn't know about toilets: though porcelain seems like pretty sturdy stuff, in a contest between a conventional toilet, and a conventional beer bottle dropped from shoulder height, the toilet loses. That is, the toilet breaks, not the bottle. That means that clubs are either replacing their toilets all the time, or (like the old DNA) they have cracked toilets swaddled in duct tape. Well, we solved this problem by getting expensive toilets that are utterly indestructible: they're stainless steel prison toilets. Seriously: some of the line items on the feature list were ``no crevices for hiding of contraband,'' and ``suicide proof!'' -- Jamie Zawinski, 10/11/2000, http://www.dnalounge.com/log/2000-10.html
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