Stockscom Report for Sunday April 23, 2000

In the last Bulletin, we were way overoptimistic about a cycle low, as stocks in particular simply let go and fell off a cliff, with high tech taking the brunt of the hit.

We should have emphasized more strongly the risk when we suggested no more than a 50 percent weighting in common stocks to be selected from among our recommendations. In hindsight a much smaller number would have been better, and best of all would have no longs and only a basket of stocks to sell short.

It is, of course, possible that a new bear market is developing but that is not our take on the market. Looking at the NASDAQ 100, which is where we predominantly find our stocks, we see a major bull trend from the October 1998 low to the high last month. From that high this index has retraced almost exactly 50 percent of the major bull move. Although that is severe enough, there is a high probability that this will suffice to cleanse the market of its speculative excess, although we do not expect any instant recovery.

Most likely the recent decline of 35 percent from the top to the recent bottom will take some further time to unwind the loans of people who borrowed money to buy stock on margin. It will take time for those that got scared to stop selling into rallies so they can just get out with a less bad loss than it once was. On the buy side, it will take time for investors to regain confidence in stocks.

Looking ahead, we expect that stocks have for the most part seen their lows and that a base-building process will now begin from which stocks can start moving onward and upward again. In all likelihood the base-building process will take many months, and likely until the fall. In the meantime there will be stocks that go up and ones that go down but it will be hard to find ones that go up substantially.

Among the Dow stocks, we see several that suggest they are unlikely to go down but instead look as if they are likely to go up or, at worst, sideways. Although you may not make a lot of money buying 3M or General Motors, the risk is small and the probability of at least some gain and possibly a very good one is excellent. We stay, however, with our primary focus on companies in areas where we expect substantial growth to occur, even if we have to wait for the bull market in this sector to get going again. If you take a 50 percent setback but have an eventual prospect of making several times your money, then you should be able to live through a setback, even one that lasts for several months. Let's put it another way. The so-called New Economy is where the action has been, is now and is likely o continue. Yes, there will be many stocks in the sector that don't make it, many of the unprofitable dot-coms. But we expect Yahoo! not only to be a survivor but also a very profitable stock to own in the long term. It makes real money, has at worst a 50 percent growth rate and it has a billion dollars in cash. The main thing is likely to be that you should own it rather than how much you pay for it.

For those that are prepared to be patient, the downside risk in prime stocks is perhaps 10 percent from here, while the two-year target is probably 50 to 100 percent. At current levels, almost all the stocks on our recommended list look like better buys than they were when originally recommended, rather than that they should be arbitrarily dumped. In particular, Broadcom, Broadvision, Ciena and Sony look like real bargains at current price levels. Perhaps even better are the stocks that have been resisting the decline, stocks like Cognos and American Power Conversion.

While this may be the average expectation, in this kind of sideways market condition, a selection of any ten stocks that look great is not likely to comprise more than half that do really well and one or two may fall badly, and some will simply wander sideways. So it will be a stockpicker's market, and probably not a wildly exciting one. Mind, you have to remember that the kind of excitement we have seen in recent years does not represent normality over the long term.

It is worth considering Microsoft as an example of a stock going sideways, but which shows how in due course value will probably make a better chart develop. The stock has been the darling of the past decade or so. Its recent decline is its worst ever in terms of percentage. It has a Price/Earning ratio around 40 and profits appear to be growing at about 25 percent. Just one more year of profit growth and sideways market action in the stock will bring its P/E and its growth rate to about the same number. It is a reasonable expectation that MSFT will do no worse than continue growing around 25 percent annually and its growth could easily accelerate again. Of course, its growth rate could decline, but that seems relatively likely to happen. On both the daily and the weekly charts the stock is well washed out and just under the current price level there is major chart support that is likely to hold. We are not great fans of MSFT but at current price levels we would far prefer to be a buyer than a seller.

Part of the point of looking at MSFT is that it is still something of a bellwether for high tech generally and, by extension, for those trading the NASDAQ stock index futures.

Stocks to Sell

None. We have to say that we have some difficulty staying with some of our worst losers and particularly Idec Pharmaceuticals. This stock has really fallen apart on us and, yes, there is a case for dumping it and going into something better, almost anything better. At current price levels, it is really oversold in the near term and it is digging into the support represented by the trading range established in the last half of 1999. The company failed quite badly to meet the profit numbers that were expected. On the other hand, it is probably one of the premier biotech research companies in the world. As such, it is likely to regain its footing in due course. We hang tough with our own small position but we are certainly not adding to it.

New Recommendations

We are not making any new recommendations as such right now, although we do say that this appears to be a great time to buy stocks lightly if you have no money at all in the market. We do have a list of new stocks that we are looking at and which for which we would like to find an entry price, depending on how the individual stocks and the markets generally perform. One of the problems with buying a stock in current market conditions that appears to have a great chart pattern developing is that the stock can suddenly swoon. We thought Intel was starting to do really well, only to see the promise go right back out of it rather suddenly.

This is the list of stocks we are now looking at:

Advanced Micro Devices(AMD)
PMC Sierra(PMCS)
Scientific Atlanta(SFA)
Disney(DIS)
United Technologies(UTX)

The old-line pharmaceutical companies are also shaping up well, including the likes of American Home Products(AHP), Warner Lambert(WLA) Johnson & Johnson(JNJ) and Merck(MRK).

These companies show how it can pay to be far more patient than you might normally like to be in giving a stock time and room to retrace. For many months it was beginning to look as if it might be Game Over for this sector, But sure enough it now appears to be turning around nicely, helped of course by a long-term history of favorable profit growth and of favorable stock price performance.

List of Current Stock Recommendations:

Note that there are several of our current recommendations which might seem to warrant selling on account of the fact that they have fallen hard. Our experience over the past year has been that it generally pays to give a great stock more room to move than many people suggest. We particularly believe that Idec and Sony are outstanding buys on what we believe to have been temporary weakness. Several biotech stocks have come under extreme pressure. Nevertheless, we don't see them going out of business. What we do see is a dynamic sector that has come through a severe thunderstorm, but which is very unlikely to be ending its bull market, let alone starting a bear market.

Action Ratings

The following is the legend for designating immediate action for our stock recommendations. The first is B, meaning the stock is timely to buy but the case for doing so right here is not overwhelming. Either the stock may have got ahead of itself and may be vulnerable to a retracement or else the stock has been performing disappointingly but may simply be regrouping. B+ and B++ indicate stocks for which there is a technical case to buy now, with plusses adding weight according to how many there are, up to a maximum of five. Stocks rated H are ones to hold, awaiting confirmation to buy more or to sell. SELL, of course, means what it says. It seldom pays to override this designation.

Stocks marked # are eligible for Canadian RSP funds. Otherwise there is a 20pc restriction on foreign stocks held in these accounts.

First bought Entry Last

4/3/00 American Power Conversion 43.38 39.94 B
3/2/00 Applied Micro Circuits(AMCC) 136.75 101.06 B
3/2/00 Atmel Corp(ATML) 50.31 45.63 B+
4/3/00 Beckman Coulter(BEC) 63.75 61.81 B+
3/2/00 Biomira(BIOM) 17.75 8.00 H
3/2/00 Biovail(BVF) 67.56 48.69 H
3/2/00 Broadcom(BRCM) 208.50 152.50 B
3/2/00 Broadvision(BVSN) 85.75 35.56 B
3/2/00 Ciena(CIEN) 181.50 97.00 H
3/2/00 Cognos (COGN) 67.09 68.00 B
3/2/00 Corning(GLW) 200.00 152.13 H
3/2/00 Fusion Medical(FSON) 17.75 16.25 H
3/2/00 Genzyme Molecular(GZMO) 29.00 11.19 H
3/2/00 Idec Pharma(IDPH) 149.88 63.13 H
3/2/00 LSI Logic(LSI) 69.25 58.00 H
4/3/00 Novell(NOVL) 28.38 20.44 H
4/3/00 Qualcomm(QCOM) 148.69 109.50 H
3/2/00 QLT Therapeutics(QLTI) 73.25 57.75 H
3/2/00 Rogers Group(RG) 33.75 27.06 H
3/2/00 Royal Phillips(PHG) 50.10 44.56 B
3/2/00 Seagate(SEG) 51.25 47.00 B
3/2/00 Sony(SNE) 303.00 236.50 H
3/2/00 TD Waterhouse(TWE) 19.88 20.00 H
4/3/00 Yahoo!(YHOO) 168.75 123.13 B

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