| Investment Views (April 24th 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.
My recommendations still stand. The tech correction is not
over yet. We see the Nasdaq
correcting further. But it will be difficult to say to which
level the stocks will fall, given the
astronomical valuations of the high flyers. We would watch to
see, if the Nasdaq Composite Index
would test the 3200 level again. Indeed it could hit 3000 level.
But if the 3000 level holds,
we should see a decisive rebound. On the other hand, the Dow stocks
and the general
market has been holding out well. Indeed we see the Dow and S&P
big cap stocks recovering further.
Momentum investing is still the fad. So we should see participants
driving up the big cap
stocks to very high valuations, before everyone switch back to the
techs again. Our gut feeling
is that we should wait until late summer or early fall, before tiptoeing
back into the tech stocks. Thus
until then it's selling into the rallies mode!
The European markets, being far less tech heavy, have not corrected
like the Nasdaq. But the Neue
Markt has followed the script of the Nasdaq. It's ironic that
the European market participants follow
the trends on Wall Street no matter how the fundamentals at home play
out. The European economy
is finally growing again. Theoretically the international investors
should be shifting their focus to
Europe. But people still seem very hesitant. They seem
to prefer the sky high valuation of the
high tech stocks on Wall Street to the more mundane multinational corporations
of Europe. But
these corporations have all reported stellar earnings growth.
So we remain optimistic about the
Euro stock markets. Some have argued that the Euro stocks are
overvalued just like those
on the Wall Street. We disagree. Valuations tend to look
high, when an economy is recovering
from recession. Stocks should appear cheap once the economy has
grown and matured.
We feel that the European economic recovery still has some ways to
go, whereas the US
economy is rapidly approaching the speed limit for noninflationary
growth.
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We decided to take Varetis off of our recommended list, because we have
the feeling that
cash could be better invested in other more promising stocks.
We recommend switching
out of Varetis into Sonera. The Sonera business is much more
solid than that of
Varetis.
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! |