NEW YORK-“The $1 trillion that came out of Nasdaq in the last five days will be looking for places to invest when things get better,” Thomas M. Galvin, chief investment officer and equity strategist for Donaldson, Lufkin & Jenrette Securities Corp., said April 6.
The latest turmoil in the stock markets may appear to have come out of nowhere, but the pattern has been building for a year. While investor exuberance has grabbed headlines, another trend has quietly and steadily emerged.
Money market funds, which are cash investments, have taken in more dollars than stock mutual funds for the past 12 months. However, investors interested in long-haul gains cannot afford to take this conservative stance indefinitely. Furthermore, there are many signs auguring continued good times, including strong money inflows into stock mutual funds during the first quarter, Galvin said.
He participated in a panel, convened by the New York Society of Security Analysts, “Market Forecast: Happy Days are Here Forever?”
“Special thanks to the day traders for drawing attention to how volatile the market is and to the fortunes of the dot-coms, which have gone from riches to rags,” said Vincent C. Catalano, panel moderator and president of iViewResearch.com.
While Catalano sees a reversal of fortune for high-flyers whose potential for turning cash-flow positive exists in the distant future, if at all, this latest speed bump is good news for the broader markets.
“The shakeout in some of the dot-com names is extraordinarily healthy because it gets rid of excess valuation and helps avoid systemic risks in the markets,” said Jason R. Trennert, managing director of equity market strategy and economic research at International Strategy and Investment Group Inc.
DLJ’s Galvin added that the filtering process following “gut-wrenching weeks like this” will compel investors to discern companies that offer golden nuggets of profitability.
“The (first quarter 2000) pre-announcement period has been eerily quiet, with the fewest negative pre-earnings announcements I’ve ever seen,” he said.
“Historically, 87 percent of the pre-announcements in the tech sector have been negative. It’s now less than 60 percent. Overall, analysts expect a 35-percent year-over-year growth for technology stocks.”
Investors would be well-advised to “focus on the unit growers” in areas like technology, telecommunications and health care “because they are the only ones that will make money,” he said. Galvin also advised looking for companies that are the “best-of-breed” in their class, like Nokia Corp., Sprint PCS and PSINet.
Joseph V. Battipaglia, chief investment strategist for Gruntal & Co. L.L.C., agreed that selectivity, not timidity, is the watchword. He advised a portfolio weighted 40 percent in technology and telecommunications, 20 percent each in financial services and pharmaceuticals and 20 percent in a variety of other sectors.
“Look for those that meet and beat expected earnings, have a good acquisitions strategy, a clear Internet strategy and retire stock as soon as possible,” he said.
Battipaglia also took his profession to task for what he believes are two basic failures. The first is the widespread phenomenon of ignoring small-cap and value stocks, the latter having low share prices relative to their companies’ earnings. In many cases, these kinds of stocks have fared better over time than darlings in the spotlight of the moment.
He also chastised securities analysts for their collective inaction in devising new criteria to evaluate appropriately the new economic model emerging from the telecommunications and technology revolution.
“Wall Street will not reveal itself to be inadequate, but the economy has become something different from 50 years ago,” he said.
“On the basis of technology alone, we have entered an entire new era, and we need different ways to value companies. We are still firmly in a bull market for growth-oriented investors.”
David N. Dreman, founder and chairman of Dreman Value Management L.L.C., said he believes the investment community’s mistake in evaluating companies has been to err too little on the side of caution.
“Are we realistically valuing the technology revolution? What are the odds these companies will ever reach the heights expected of them? We’ve already seen e-tailing blow up and B-2-B (business-to-business electronic commerce) is stalling,” he said.
While the S&P 500 rose about 140 percent since 1996, the Nasdaq 100 has risen by more than 650 percent, a phenomenon unique in the last century, Dreman said.
“It’s disconcerting that 70 percent of the Nasdaq 100 is owned by the general public, and the amount bought on margin (credit) has gone up 500 percent in the last few years,” he said.
