Stockscom Report for Sunday May 14, 2000

Hold Most High Tech - Sell Bonds - Buy Oils

We still believe that stocks are not in a general bear market, despite the huge decline in many stocks since March. On the other hand, there are very few stocks that look as if they are likely to do much any time soon. After the seeing such huge gains coming as if that were the natural order of things, it seems positively abnormal to find that stockpicking has become more difficult.

We have had our share of difficulties in the past couple of months, and in all honesty we should have known better than to venture back into high tech stocks at all. Having done so, we cannot of course put the clock back and we have to decide what to sell, what to hold and what if anything we could consider buying with new money.

Our view now is that no new money should go into any stocks other than petroleum unless you know something extremely special and, in addition, the chart patterns are shaping up extremely well. We must emphasize both barrels of that caution. We have seen charts shaping up well only to have stocks fall apart. We have also seen what seem to be wonderful stories combined with good chart action and the stocks still fall apart. Conspicuous among our failures on both counts are Idec and Novell.

We are expecting that whatever the US Federal Reserve does with interest rates on Tuesday, there will be some kind of relief rally, and probably quite a powerful one. However, conditions look to us like 1994, when interest rates were also rising. We expect the majority of stocks to work sideways from here, with a few selected issues to ratchet very grudgingly higher. We very much doubt whether much is to be lost by simply standing aside with new money. As for what you already hold, having been patient this far, it will probably pay to continue hanging in.

Most likely the interest rate increase will come in at half a point, although a mere quarter point is possible. The trouble with the US raising interest rates is that it tends to strengthen the Dollar, which is exactly what the European currencies don't need. Nevertheless, if Alan Greenspan fails to make his move now, then it will become more difficult to do so should further rate increases prove necessary as the presidential election approached.

Regardless of whether the rate increase is a half or a quarter point, we strongly believe that this is no time to own long-term bonds. Incipient inflationary pressures are mounting and they are real. Many people including ourselves thought that the increase in oil prices might be a relatively temporary phenomenon. That's why we have been slow and even reluctant to return to oil stocks. We now believe that higher oil prices are here to stay. In fact, the charts suggest that they might go a lot higher, and more especially natural gas prices.

Despite the savage decline in many high tech stocks, we believe that their fall has to be seen in perspective. At this point the NASDAQ 100 index has still not come back to the major long-term uptrend line from the October 1998 low. That it has not done so is a function of the immense power of this bull market. When stocks for a pastime double and quadruple several times, a setback of 50 percent or even more does not necessarily negate the uptrend.

Many of the stocks that have been badly beaten down, like Broadcom and Boradvision are involved in broadband technology, the fastest growing area of high tech. So they are likely to see corporate growth catch up with the current share price in due course, and then ignite the stocks. You have only to see the long-term chart for Ciena to see how a high tech stock can go through an extremely bad patch only to come back like gangbusters. That stock, incidentally, now looks very good indeed.

We also regard it as important to note that the growth of the US economy for the past two quarters at an annual rate of 6 percent represents very real growth for high tech companies. Many of them really are growing at an annual rate above 20 percent and some of them at rates approaching 100 percent. If you buy a stock like Microsoft and it continues growing at, say 25 percent, then it really does not take long before it grows into its current stock price. At its current price of $68.81 it sports a Price/Earnings ratio of 41. Assume the relatively low expectation of 25 percent growth. Then assume that the stock of a company growing at 25 percent should have a P/E of 25. Then it should take a little over a year for MSFT to grow enough to achieve the conjunction of growth rate and P/E. Of course, it is possible that the company's growth might slow to less than 25 percent, or even turn negative. In that case, the stock might be expensive even here. We are inclined to doubt that MSFT will fall short of 25 percent growth in the foreseeable future. We happen not to be all that keen on MSFT, be we look at it all the time as the bellwether for high tech, or at least for more mature high tech.

Although we rate MSFT a fair stock to hold at current price levels, there are many high tech leaders that still look overpriced, or at least vulnerable. Among them we include Cisco, JDS Uniphase and carriers such as MCI Worldcom.

We have had a terrible time with our bio-tech stocks. They have generally done worse than many high tech stocks. Nevertheless, in most cases they are doing things that could in due course multiply their stock price by several times. Many of these stocks, like Idec, are now at or near the pivotal 200 day moving average. That is often a level where stocks are a screaming buy (at least when you look back in hindsight), and are not therefore a sell.

In current market conditions we see holding about 25 percent cash, 25 percent petroleum, 25 percent high tech and 25 percent bio-tech. We regard the downside risk as relatively moderate after the recent decline. Except for petroleum, we regard the prospect of significant upside potential as slim, although we expect high-growth and soundly financed high tech stocks to ratchet grudgingly higher. If you are prepared to be patient, we regard the looming-term prospects for stocks like Corning and Yahoo! as superb.

One stock we are hanging onto is Novell. Having let it get away on us, we suspect that it has truly reached a long-term support level. It came in with disappointing results. Nevertheless, we thought we were enamored of the story of its proprietary technology for the internet, and we have not heard anything to change that opinion. Nevertheless, there is some prospect that this company may be on its way to oblivion. It is all but inevitable that will happen occasionally, even with what started out as a blue chip among the Dow industrials, several of which have gone bankrupt over the years.

Stocks to Sell

As much as anything else, our objective in selling stocks here is to raise money with which to buy oil stocks. Some of the ones going out may well be worth retaining, but we hesitate to guess which. One benefit of delaying before selling stocks is that some like Idec and Broadcom now really look as if they are stabilizing. We love the story behind the companies and we look the monthly charts. So we trust our judgment to stet with the stocks.

American Power Conversion(APCC). We like the stock in principle, but we like oil stocks better. The stock could keep on falling like Novell and we don't like the reward to risk.

Atmel Corp.(ATML). This stock may be all right but it has not done well compared with other high tech and we know nothing special about the company to make us want to stay with the stock.

Qualcomm(QCOM). We thought we loved both the chart and the story. The trouble is that the stock is extremely expensive according to all conventional valuation criteria. So it could keep on falling and we don't know where it might stop. Better to put the money into a more trustworthy oil stock even we if we miss out on an opportunity.

TD Waterhouse(TWE). We don't like what we hear about the slowdown in the brokerage business and we think we may have made a mistake with this stock.

New Recommendations

We were looking at a few stocks in our last Bulletin that seemed as if they might warrant buying even though we were not giving a formal buy recommendation. Among them were Scientific Atlanta and PMC Sierra. If we owned these stocks, we would want to keep them. However, in view of the generally uncertain picture for the immediate future in high tech, we hold off. One stock, however, now advances to the formal buy list and that is United Technologies(UTX). This is a powerhouse of a company and its stock price has done relatively little for the last two or three years. Now it looks as if it might blast out. One kicker for this company is that it is one of the two world leaders in hydrogen fuel technology. (The other is Ballard Power, of Vancouver, BLDP.)

United Technologies(UTX) $64.25.

While we could see buying almost any oil stock or oil service stock, we have made a short list that includes three categories: producers, international integrated, and oil service. The producers are fairly heavily weighted toward natural gas, which we see as having even more promise than liquid petroleum.

Alberta Energy Company(AOG)# 38.50
Apache Corp.(APA $59.63
British Petroleum Amoco(BPA) $54.13
Canadian Occidental Petroleum(CXY)# $26.31
Chieftain Development(CID)# $20.50
Global Marine(GLM) $26.63
Nabors Industries(NBR) $42.25
Shell Transport & Trading(SC) $51.81
Transocean Sedco(RIG) $51.63
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 32.38 SELL
3/2/00 Applied Micro Circuits(AMCC) 136.75 101.31 H
3/2/00 Atmel Corp(ATML) 50.31 45.63 SELL
4/3/00 Beckman Coulter(BEC) 63.75 62.00 H
3/2/00 Biomira(BIOM) 17.75 9.88 B
3/2/00 Biovail(BVF) 67.56 43.00 H
3/2/00 Broadcom(BRCM) 208.50 149.44 H
3/2/00 Broadvision(BVSN) 85.75 45.75 B
3/2/00 Ciena(CIEN) 181.50 137.25 B+
3/2/00 Cognos (COGN)# 33.00 32.81 H
3/2/00 Corning(GLW) 200.00 187.69 B
3/2/00 Fusion Medical(FSON) 17.75 12.25 H
3/2/00 Genzyme Molecular(GZMO) 29.00 13.19 H
3/2/00 Idec Pharma(IDPH) 149.88 78.50 H
3/2/00 LSI Logic(LSI) 69.25 49.50 H
4/3/00 Novell(NOVL) 28.38 10.09 H
4/3/00 Qualcomm(QCOM) 148.69 98.00 SELL
3/2/00 QLT Therapeutics(QLTI) 73.25 51.69 H
3/2/00 Rogers Group(RG)# 33.75 25.56 H
3/2/00 Royal Phillips(PHG) 50.10 43.69 B
3/2/00 Seagate(SEG) 51.25 45.03 H
3/2/00 Sony(SNE)# 303.00 219.00 H
3/2/00 TD Waterhouse(TWE)# 19.88 17.69 SELL
4/3/00 Yahoo!(YHOO) 168.75 125.69 H

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