| Investment Views (March 20th 2000) |
Most internet companies serving consumers are but more exulted mail-order
business with
some advertisement revenues and telephone commissions. But as
the telecom markets
libralize and flat rates for internet access becoming the norm, the
commissions that
these companies earn will eventually decrease. Ad revenues
are limited too: An
internet page is only so big. There's only limited space for
advertisement. Thus even the
Yahoos of this world faces slower revenue growth and are looking to
grow by acquisition.
But acquisitions are an expensive way to grwo revenues for shareholders,
as the shareholders
of the likes of AOLs found out.
Thus I repeat what I have pointed out long time ago, the e-retailers
have shown themselves
to be unable to make a profit. The amazons of this world have
no pricing power. Indeed we can
regard the e-retailers as the modern day Robin Hoods. Robbing
the rich (shareholders) to subsidize
the middle class consumers. But there are still strong techs out there:
the B2B internet stocks,
the software and net infra-structure stocks. Although no one is making
money on the internet,
it is still paramount for all companies to present themselves on the
net, if only to defend their brand
image. So we should see continued investment by companies of all sizes
on e-commerce software,
and internet infra-structures. And companies will have to get ready
for the next wireless phone
internet presence. Therefore we wouldn't sell off all tech stocks indiscriminately.
We recomend
taking profit by selling half or a third of the holdings where
the stock prices have doubled or
trippled. Diversification has never been wrong for long term
investors.
The Dax finally succumbed to the influence of the Wall Street correction.
The correction
on the Dax was swift and furious. The market tumbled within days
below the 7400 level.
Thus far the Dax has not recovered above the 8000 level. The
Neue Markt, Germany's
equivalent of the Nasdaq is also correcting. The euphoria
for newly issued stocks is subsiding.
These stocks now only double on the first day of trading instead
of trippling or quadrupling.
The CAC has been even more positive than the Dax last week. The
correction is also
steep but less furiously. We also saw some selective rotation
into cyclicals and
pharma stocks.
The Swiss market profited from the more positive attitude of the investors
towards
the old economy blue chip stocks. The SMI briefly hit the 7370
before giving back
all the gains and some more. The problem with SMI is still the
fact that it is heavily
weighted towards insurance and bank stocks as well as pharma stocks:
the three least
popular sectors for investors. Plus the world markets are performing
well. There are
far less need for capital to seek the "supposedly" safe haven
of Switzerland.
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After some long and hard thinking we decided to recommend buying a half
position in Biodata.
The name Biodata is misleading. It sounds like some biotech company
rather than what it is:
a company specializing in computer security and encrytion. It
came on the market a few weeks
ago. It's a very pricy stock since it is already trading more
than 700% its offering price. But then
a company chosen by the Bundesbank to safeguarde its computer
system is not just any old security
company.
Evotec had corrected in sympathy with the other biotech stocks.
We would buy more, if
it should come down even more.
When talking about the asset bubble, analysts and jounalists tend to
forget about
the volatility of the bond , currency and real estates markets in the
last decades which cause
investors to be less than enthusiastic about those instruments.
Stocks have shown themselves to be a better
investment for the long term. As this insight begin to sink in
the psyche of the world baby boomers,
we should see greater allocation to equities than ever in history by
the European and Japanese investors.
That trend will cushion the blow of the rising interest rates in the
US.
The internet will transform our world in a massive way. I think
it is time to
begin and do some thinking on what kind of change it will bring and
see if
we can draw some conclusions that are relevant to our investment decisions.
First, as we have opined in this column we do not believe many of the
today
sky high internet stocks will eventually make a lot of money.
The internet
is such a competitive forum. The pricing pressure is so great
so that only
providers with brand name recognition and meaningful contents will
be able
to have some pricing power. We must remember what the internet
eventually
will bring is absolute international competition. Price competition
will be fierce.
Middle men will be eliminated. Therefore we see many service
sector jobs
will be eliminated. For example, we see this trend in the financial
sector already.
More and more people are trading stocks on line. With internet
brokerage
charging less than $10 per trade, we should see brokers and financial
advisors
being eliminated at major brokerages in a big way soon. The same
should
happen in other tradable items. For example, there will be less
need for
retail stores for items that one can buy easily on the internet.
Of course
there will be branches of the economy that will profit. For example:
the telecoms, the Federal Expresses, and the computer software industries.
But the question is: Will the general economy really profit or will
the general
deflationary trend continue and become worse and worse? Without
pricing
power and with lots of jobs being eliminated and salaries on hold,
we see
the world economies trending toward deflation, even if it continues
to grow.
That means real estates and gold will become even less appealing.
If we
believe our argumentation, we would not invest in the "internet" stocks
themselves but in the companies that do have contents and pricing power
as well as companies that will offer services to the internet providers
and users: ie. companies such as Sony, Time Warner, Dow Jones,
and UPS. We would also recommend the stocks of Corsair (CAIR),Qualcomm,
Ericsson, Nokia, Epcos the equipment and software provider for
the CDMA,
the next wireless telephony standard as well as stocks of telephone
companies
like Sonera, ATT, Worldcom-MCI, Colt Communications, and Swisscom.
We also
see internet companies needing ever more sophisticated software.
Therefore
we're quite optimistic about the long term future of the likes of IBM,
Oracle,
SAP, Cap Gemini,Broadvision and i2 technologies.
| *The stock prices are provided for informational purposes only and not intended for trading purposes. The opinions expressed in these pages are what they are: opinions! |