Telecom Woes Drive Nasdaq Below 2,000
The reeling telecom sector suffered a new blow Monday as key stocks plunged to two-year lows--dragging the main Nasdaq index below the 2,000 mark for the first time since mid-April.
Amid the slowing global economy and a glut of supply of communications equipment and networks, some analysts are warning that a turnaround in sales and profit is nowhere in sight.
That sentiment drove many already battered telecom stocks down 10% or more Monday, pulling the Nasdaq composite index down 2% to 1,988.63, its first close below 2,000 since April 17.
For investors who thought they’d seen the worst of the tech/telecom bear market when Nasdaq bottomed at 1,638 in early April, the fresh lows for such one-time stars as JDS Uniphase and Corning Inc. threaten to further undermine confidence.
The Los Angeles-based Common Cents Investment Club paid $97.60 a share for JDS Uniphase, which on Monday closed at $10.60. The club’s holdings in Nortel Networks, ADC Telecommunications and Corning have been clobbered nearly as hard.
Now, the 14 members share a dilemma with millions of other investors in telecom shares: As club member Frances Hrobak put it, “Do we hold or do we fold? As a group, we’re kind of split.”
In a report last week titled “Nuclear Winter,” Merrill Lynch analyst Steven Fox said recent field checks led his team to believe that Corning’s high-margin fiber optic business over the next few quarters will be below “even our worst-case scenario” as its customers cut spending.
“Given our new fundamental outlook, we now think it may take 12 to 18 months” to realize a decent return on shares bought at under $20, he wrote. The stock now trades at $13.40 after falling $1.10 Monday.
Though stock declines of this magnitude often attract “value” investors, some analysts warn that it’s too early to make a value bet.
“It’s a commodity. Nobody has the foggiest idea, nor do they care, whose fiber their voice is traveling on,” said Paul Blaustein, who manages Whitehall Growth, a large-stock mutual fund that has shied away from the networking and telecom equipment groups.
“There’s a point where demand will reach the level of supply and prices will stabilize. So sure, there’s a price at which some people can get in and make money in these stocks. But it’s a trade, not a long-term investment,” he argued.
It’s even unclear, of course, when equipment prices might stabilize. “In a commodity business you can have long, long periods of darkness,” Blaustein said. “There are loads and loads of fiber out there unlit.”
Investors in telecom stocks face more than fundamental issues, analysts note.
Chip Hanlon, president of the Huntington Beach-based investment advisory firm Unfunds Inc., notes that the stocks face an uphill battle for the foreseeable future because of “a huge degree of overhead supply.”
“There are a lot of people who bought, say, JDS Uniphase at $60, thinking it was cheap” compared with its peak of nearly $150, Hanlon said. “If they see it bounce up to $30 they may jump on the chance to sell, promising, ‘Thank you, Lord, I’ll never buy another tech stock as long as I live.’ ”
The latest rout in the stocks is another psychological blow to investors who have continued to hold on--and believe in the sector’s future.
“It’s a long way down, and we’re forced to look at the numbers on our statement every month [when we meet],” Common Cents-club member Hrobak said. “But selling is our most difficult decision, especially considering the long-term potential of these industries.”
Russ Koesterich, investment strategist at Instinet Research in New York, said that watching stocks crash through their early-April lows “reinforces the idea that a recovery is not going to materialize for a while.”
Koesterich warned that wireless communications providers, companies such as Sprint, Nextel Communications and BellSouth, as a group are carrying high debt levels in relation to net income. That means continuing problems for supplier firms such as Qualcomm, Motorola, Lucent Technologies and Nortel, he said.
“There’s a dual problem: a huge inventory overhang at a time when these [supplier] companies’ main customers are saddled with a lot of debt,” and thus must rein-in spending, he said.
Stock chart-watchers say another argument against a quick recovery is that many investors are still looking for entry points into the stocks, or looking to “average down” their cost basis by acquiring more shares, Hanlon said.
“We haven’t had a true washout,” he said. “I’m still getting calls from clients asking, you know, ‘Is it time to buy Cisco [Systems] yet?’ When I stop getting calls like that, then it might be time to buy Cisco.”
He thinks the stocks could be “dead money,” trading at roughly the same levels in a year as rallies continue to fizzle.
“These stocks could be in a sideways pattern until we work through the overhead supply. I wouldn’t be surprised to see the bouncing ball pattern of rally-failure-rally-failure continue.”
Rafael Resendes, co-founder of Chicago-based Applied Finance Group, an advisory firm that works with institutional investors, said some of the decimated stocks, including Corning, JDS Uniphase and Juniper Networks, are now at the point that they make sense as long-term investments.
“The industry should experience renewed growth once the glut works itself out,” Resendes said.
Still, some of the stocks, including Cisco--which trades at a price-earnings ratio of 56 based on fiscal 2002 profit estimates--remain too expensive for him to recommend, he said.
Hrobak said several club members still like the networking and telecom stocks, noting, for example, projections for a huge wireless market in China long term.
Even Merrill’s Fox sees spring eventually following nuclear winter: He maintained Corning’s long-term “buy” rating, noting its “leading position in excellent long-term growth areas.”
Instinet’s Koesterich warned that all earnings estimates are in flux these days, however.
“It’s hard to value any company based on expected growth rates when every assumption is undercut,” he said.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Nasdaq Sinks Under 2,000 . . .
The technology-dominated Nasdaq composite stock index slumped 39.80 points, or 2%, to 1,988.63 on Monday, its first close below 2,000 since April 17.
*
Nasdaq composite index, weekly closes and latest
Monday: 1,988.63, down 39.80
*
. . . as Telecom Stocks Plunge Anew
Telecom stocks have led the tech sector’s latest slide amid fears that the glut of telecom equipment in the marketplace is worsening. Such former stars as JDS Uniphase and Nortel Networks fell Monday to two-year lows. Monthly closes and latest:
*
JDS Uniphase
Monday: $10.60, down $1.84
*
Nortel Networks
Monday: $8.52, down $1.34
Source: Bloomberg News
