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Cisco
Hits a 52 Week Low - Is it too Late to Rotate Out of the Tech Sector to a Low P/E?
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Ed Wijaranakula, Ph.D.
Director of Market Analysis, Infotix
Systems, Inc. - February 12, 2001
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The NASDAQ market
sentiment has reversed course for-the-worse, starting again when the Federal Reserve
announced a 50 basis-point cut on January 31. Market watchers suggested
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that the
downturn was caused by disappointment as Wall Street was anticipating a much deeper
cut. The deterioration in market sentiment accelerated as Cisco Systems'
[NASDAQ :CSCO] quarterly earnings missed the general analysts' consensus estimation by a
penny.
Mr. John Chambers,
Cisco's CEO, is cautious about Cisco's near-term revenue, which could be either flat
or even 5 percent below last year's revenue, as the macro economy continues to slow
down. He, however, pointed out that the company is gaining market share
despite the fact that "we are in the pause period".
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Although Mr. Chambers is
highly confident in the long-term fundamentals of the networking equipment sector and his
company's outlook, Wall Street analysts remain either skeptical or pessimistic, citing
concerns about Cisco's near-term inventory level as well as increasing competition from
Juniper [NASDAQ:JNPR].
Based upon our
analysis, investor sentiment for the networking equipment companies, including Cisco and
Sun Microsystems [NASDAQ :SUNW], has already shown negative signs since November of last
year as the uncertainty of the Presidential election loomed and the media began
questioning the survival
chance of dot.com companies.
Our research indicates that the number of so-called "Click-and-Mortar" companies
has increased rapidly, rather than decrease, despite a massive fall-out in publicly-owned
"pure play" Internet e-tailers. According InfoWorld, giant retailers including
L.L.Bean, Disney, Staples and the Gap, are installing Web kiosks in their physical stores
with many other companies expecting to join the kiosk crowd. We believe that
shoppers who have never been shopping online, could gain confidence at these Web kiosks
and may feel less threatened by online shopping. Therefore, we are expecting an increase
in online shopping traffic as well as in the demand for advanced networking and data
storage equipment.
We don't anticipate any effect on the demand for networking and data storage equipment by
the fall-out of publicly owned e-financial companies, as major investors begin to bail
out. According CBS MarketWatch.com, the New York Times [NYSE:NYT] sold essentially all of
its stake in TheStreet.com [NASDAQ:TSCM] on January 4 while Softbank, a Japanese-based
Internet investor, announced a plan last month to sell almost half a million shares of the
company.
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Since late last year, we observed that fund managers began to rotate their funds from the
tech sector to low P/E or defensive stocks, in anticipation of a downturn in the macro
economy. This trend resulted in a steady increase in investor sentiment of companies such
as Phillip Morris [NYSE:MO]. Considering the arguments that the popularity of low
P/E or defensive stocks has increased significantly among institutional fund managers, and
that positive sentiment cannot grow indefinitely, we anticipate a near-term correction in
this sector. Assuming that the growth-rate in investor sentiment for companies such
as Phillip Morris continues as is, we believe that a near-term correction and the rotation
from low P/E defensives back to the high tech sector could occur in the next three to six
months.
Our model is strongly supported by the argument that the rate easing by the Federal
Reserve could refuel capital spending as companies prepare for the economic upturn.
While Wall Street is presently embracing the low P/E or defensive sector, Wall Street' s
sentiment could rapidly change without advanced notice. Therefore, Main Street investors
may need to carefully re-examine their current fund positions and ask themselves whether
it is too late or not to rotate out of the tech sector to a low P/E.
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About the Author: Dr. Ed Wijaranakula is presently the Director of Market
Analysis at Infotix Systems, Inc. Prior to Infotix Systems, he has worked with
Intel, Hewlett-Packard, Micron, Motorola and Texas Instruments and has held senior as well
as managerial positions in semiconductor manufacturing companies. He has published over 80
technical papers and holds more than 12 U.S. and foreign patents. His portfolio holds long
positions
or controls in CSCO and SUNW.
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