A Trillion for Cisco, but Not a Dime for All Else?

They should never have used the “T” word.

In a market in which the only stocks with any near-term potential are those that are already outrageously priced, we’re now asked to contemplate the possibility of the world’s first trillion-dollar company.

It would, of course, be a U.S. technology leader--specifically, computer networker Cisco Systems.

After Cisco last week reported quarterly earnings up nearly 50%, its shares soared as high as $136.25, raising the 15-year-old company’s market value (stock price times number of shares outstanding) to $465 billion.

That knocked century-old General Electric out of the No. 2 market-value spot among U.S. companies, and put Cisco within reach of No. 1 Microsoft, at $520 billion.

On Wednesday, brokerage CS First Boston suggested that everyone should stop being so small-minded: Analyst Paul Weinstein declared that Cisco is on track to top Microsoft in the next few years and become the first company with a market value exceeding $1 trillion.


On the face of it, that’s not really asking much of Cisco--just a little more than a doubling of the stock price from here, which is what the shares did in 1998 and again in ’99.

At twice today’s price, Cisco would trade at about 260 times estimated fiscal 2000 earnings per share. The good news: That would still be a lower P/E than, say, Internet auctioneer EBay’s.


Even so, by Friday acrophobia set in among at least some tech stock owners, dragging the Nasdaq composite index down 2% from Thursday’s record high. Even Cisco had to give some back, falling $5 to $130.94. It’s a great business Cisco has, providing the backbone of the Internet. But the surge of hacker attacks on big-name Net sites last week may have given a few investors reason to ponder whether the new, virtual economy could be hijacked overnight by a 14-year-old computer whiz with too much time on his or her hands.

Yet, for the week, the damage was far worse in the “old economy” stocks of the Dow Jones industrial average. The Dow slumped 218.42 points on Friday, or 2.1%, to 10,425.21. That’s the lowest close since Oct. 27, and leaves the blue-chip index solidly in “correction” territory--down 11% from its record high of 11,722.98 on Jan. 14.

Talk of a trillion-dollar valuation for Cisco just reinforces that this has become a stock market in which everything, and nothing, is possible.

Everything seems possible for the relatively small number of tech stocks that are keeping Nasdaq aloft.

But nothing seems possible for the rest of the market, other than continued misery.

Some sellers of Dow stocks on Friday may simply have done the math: Let’s see, if Cisco is going to fetch $1 trillion in market value, then a huge sum of money is going to have to come from somewhere else to bid Cisco shares higher.

We can surmise that investors are unlikely to sell the other tech stock leaders to raise money for Cisco purchases. They’re far more likely to sell the large, liquid old-economy stocks that are already sliding.

Hence, owners of such names as DuPont, Exxon Mobil or Merck may increasingly be figuring that they should get out now, rather than wait for the next rush of selling by investors who need cash to buy (or buy more) Cisco, Intel and Motorola, or the newest Internet-related initial public offering.

A sharp jump in stocks like DuPont and Merck at the start of this year, offering hope that the market’s advance was finally broadening, was nothing but a grand fake-out. After rising 9% in the first week of 2000, chemical giant DuPont has tumbled 29%.

Things are arguably worse for many value-oriented investors who thought they were buying bargains among stocks that fell sharply in 1999. Instead, most “value” stocks have turned out to be traps. Weak stocks have just gotten weaker.

How bad is it, overall? The Standard & Poor’s index of major railroad stocks fell last week to its lowest level since 1995. Ditto for the S&P; aerospace-stock index. The S&P; food stock index is at a three-year low; the S&P; regional-bank index likewise is nearing a three-year low.


True, this is a just a continuation of last year’s trend. Happy investors loaded up with technology and telecom issues may well ask, What’s the big deal? Something is always out of style in the stock market.

I, too, had felt that the broad market’s slump last year was less worrisome than Wall Street’s bears made it out to be. But the continuing collapse in recent weeks of many individual stocks and market sectors, apart from technology, should give any optimist pause. Nothing about this market’s trend looks healthy or constructive.

Even in the tech-stock arena, some of the leaders, like Oracle and Sun Microsystems, have suffered through violent swings over the last two months that suggest buyers have little conviction about staying put.

Ricky Harrington, a veteran market chart-watcher at Wachovia Securities in Charlotte, N.C., fears that the declines in so many stock groups to multiyear lows may be signaling an imminent economic recession--and plummeting corporate profits.

The Federal Reserve is, after all, trying to slow things down with its interest rate hikes. Maybe the market is telling us that the Fed will overdo it.

Other Wall Street pros, however, note that the stock market’s record of forecasting recessions is fairly dismal. Besides, the action in the bond market (with yields in general still rising) and in the commodity markets (the CRB/Bridge index of 17 major commodities last week rose to the highest level since mid-1998) suggests continuing economic strength, not recession, notes Phil Roth, technical analyst at Morgan Stanley Dean Witter in New York.

Nonetheless, Roth believes that the bull market is living on borrowed time. The only stock game worth playing now is the one that everyone else is playing, he says--the “momentum” game of buying only those issues that are already going up.

The flip side, he said, is that it’s too early to think about trying to pick up value stocks. In an environment like this one, he said, “ ‘Cheap’ is a stupid reason to buy anything.”

But in a bull market that has broken nearly all of the rules, could the latest market shakeout fool everyone and give way to a sudden broad advance?

John McGinley, editor of Technical Trends newsletter in Wilton, Conn., takes the opposite view. The fact that this market has confounded historical rules for so long, he says, makes it all the scarier. “When you fly around a black hole,” he says, “we’re told the usual laws of physics don’t apply.”


Tom Petruno can be reached by e-mail at

The Weak Get Weaker

Investors who have attempted to bottom-fish--buying big-name stocks that either rose little in 1999 or declined sharply--have generally been socked with more losses this year as weak stocks have gotten weaker.