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The week started out great with a strong showing by most of the Market Leading Technology Stocks until news of Inflation served as a rallying cry for the bears.
Consumer prices rose .7% in April, the biggest monthly rise in more than 8 years according to last week's labor report.
There are two major events that determine the market: Earnings and Inflation. The good news is that corporate earnings continue to dominate wall street's expecations. This is likely to continue as the international economy grows and demand for our products and services, especially technology, increases. However inflation could signficantly slow the market down as investors, especially institutional forces, consider non equity options, like bonds and government securities. We will need to eye closely the other inflation indicators in the future.
In last week's Market Update I commented on EMC and how attractive it looked in the wake of the news of HP. EMC started the week at 97 and finished at 103.75. It actually climed to 112 in the middle of the week prior to the inflation news. I still feel EMC is a great buy for the long term.
I also commented on the bandwidth builders: Cisco, Lucent, ATT, MCI Worldcom, and Qwest. Cisco fueled the market early in the week with outstanding earnings and the announcement of a 2 for 1 stock split (see below for my thoughts on stock splits and the common misperception of buying into companies after a split is announced). Cisco started the week at 110 and finished at 115.5. It moved to 123 at its high for the week before correcting with the rest of the market. As for the rest of the bandwidth builders, they are all very good long term buys. As always you will need Guts to do so.
This week I'm adding a new company to my list of stocks I dont own, but want to. Broadcom is the company. "Broadcom is the leading producer of broadband computer chips. Their products enable high speed transmission of data over existing communications infrastructres, most of which were not originally intended for digital data transmission." (from Broadcom's website) Last week they announced a new chip that can deliver video, voice and data over conventional copper wire networks 10 times faster than current technology. Regarding their fundamentals, Broadcom made $203 million in total revenue in 1998. In 1997 they made $37 million in total revenue. Gross profit increaded from $22 million in 1997 to $115.7 million in 1998. Regarding their most recent quarterly report, Broadcom increased its quarterly revenues from $35 million in 98 to $96 million in 99. Their net income increased from $7.6 million in 98 to $19.2 million in 99. Its clear they are growing fast. As broadband continues to explode so will Broadcom's revenues. The downside is their stock price of 93.5 is almost its 52 week high of 100.5 (hit last week) and it's p/e ratio is 196. So its valued very high right now. I look foward to the next market correction so I can buy Broadcom.
I quick word about stock splits. Many investors buy stocks after the announcements of stock splits. I don't recommend doing this for a few reasons. First, often after a stock split announcement, the price increases due to the pyscological effect it has on the market. The right strategy is to already own the stock prior to the annoucement so you can ride the upside wave which is caused by the annoucement. Also, some investors actually like to wait until the split occurs (usally 4-8 weeks after the annoucement) because they think they are getting twice as many shares as they would before. This makes absoutely no sense at all. Let's look at an example: Stock XYZ is priced at $100 a share. They announce they are splitting the stock 2 for 1. After the announcement the stock rises to $110. Six weeks later the stock rises to $120 the day before its splits. The day after it splits 2 for 1 the stock closes at $62 a share (62 X 2 = $124). If you owned 10 shares before the annoucement (you invested $1000 and received 10 shares of XYZ at $100 per share) stock XYZ would be worth $1240 the day after it splits and you would own 20 shares. If you wait until the day after it splits to make your $1000 investment in stock XYZ you would only own 16 shares, 4 shares less than if you bought XYX prior to the split announcment. Now it's obvious I made some assumptions but you can see my reasoning better with an example.
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