The US stock exchanges continue to rise, and the experts are finding a plethora of reasons to explain the surge. Examples: success in Afghanistan; the lack of alternative investments, due to the extremely low interest on deposits; and the fact that 78% of new mortgages are refinancing deals that improve the terms of old mortgages by taking advantage of lower interest rates. These refinancing deals, in turn, free up cash for investments and consumption, and boost public confidence.
The experts are not claiming that share prices are low. Many blue chip shares, such as Cisco Systems (Nasdaq: CSCO), Applied Materials (Nasdaq: AMAT), Intel (Nasdaq: INTC), Siebel Systems (Nasdaq: SEBL), and Marvell Technology (Nasdaq: MRVL), which shot up 15% on Friday after publishing its results, have been cruising at prices reflecting multiples in the 50-100 range. These companies expect far less than 50% growth in the coming year.
The explanation as to why institutional investors continue buying at prices that reflect such multiples was provided by a portfolio manager, who summed up last week's trading in an interview with CNBC broadcaster Maria Bartiromo last Friday by saying, "Shares should be bought when they appear expensive and sold when they appear cheap. She even added a "Buy" recommendation for Analog Devices (NYSE: ADI), a chip manufacturer, which has a multiple of 50 or higher, and, incidentally, is publishing its results this week.
The logic behind this statement is that shares appear to be very cheap in boom years, because most analysts issue unreasonable double and even triple-digit growth percentage forecasts, which makes the multiples appear reasonable and share prices seem low (Mercury Interactive Corporation (Nasdaq: MERQ) was considered cheap at $120). The portfolio manager says that analysts are now issuing stingy forecasts, which makes shares appear expensive, but she believes they are cheap, because growth in the coming years will be much higher than anticipated. She is right, at least as far as last month is concerned.
Last week began with the air crash in Queens, New York. Despite the crash, the Nasdaq rose by almost 4%. It appears that the September 11 terrorist attacks marked the peak of fear for Americans and a bottom for the market that will probably not be reached again.
One US share in the headlines last week that affects my portfolio is Hewlett Packard (HP- NYSE: HWP). Chairman and CEO Carly Fiorina, who has absorbed the most criticism of any company executive in recent weeks, surprised the investors and analysts with better than expected results, and the share soared close to the price at which it had been trading before the merger with Compaq (NYSE: CPQ) - $23.
The turnovers and share price of Indigo NV (Nasdaq: INDG ) also rose, because institutional investors realized that they can buy HP at a lower price by purchasing Indigo. If the HP share is traded above $23.50 for the twenty days before the HP-Indigo merger deal is closed, which is expected to be at the beginning of January, Indigo shareholders will receive more than the known price of $7.50. They will receive HP shares at a ratio of 0.33. For example, a $25 HP share price will raise the price of the deal to $8.25 per Indigo share. I will not comment on the other alternative, which requires a three-year wait, since Indigo founder, chairman, and CEO Benzion (Benny) Landa has announced that he is choosing it and consequently will receive most of his allocation according to this alternative, which takes Indigo's performance into account.
The few analysts who support the HP-Compaq merger claim that Fiorina's plan will bring the result that everyone wants to see - HP's exit from the computer field. They assert that Fiorina will implement the withdrawal in a manner that, according to her prognosis, will result in HP shareholders receiving the highest return in the long term. According to these analysts, she plans to split the company by spinning off the entire, merged $50 billion computer and computer services field through the stock exchange, leaving HP with its original and very profitable $20 billion printing business. That is what Fiorina is fighting for now, and it is obvious to everyone that a rejection of the merger at the shareholders meeting will also spell the end of her career at HP.
This week, I finally achieved a significant, positive return of over 5%, thanks mostly to Radware (Nasdaq: RDWR ), which rose 29%, MRV Communications (Nasdaq: MRVC), which shot up 30%, and Marvell, which published its results, meeting expectations, after Thursday's trading. The stock proceeded to soar on Friday.
Marvell's rise on Friday stemmed from the fact that its management sprang two surprises in the conference call. The company raised its sales forecast for next quarter from 6% to 10% growth, compared with the previous quarter. To the best of my knowledge, this is the only communications chip company that is growing every quarter and remaining profitable in these trying times. The second surprise was management's declaration that, while the storage chip field had been solely responsible for Marvell's growth up until now, it now sees signs of growth in communications chips, i.e. in Galileo's field.
Galileo has more than a few projects slated to achieve large-scale sales next year. If the organizational communications market, Cisco's market, does begin to grow, the potential for Marvell's growth, over and beyond the forecasts, is so great that our above-mentioned portfolio manager's theory would be justified. What looks expensive now (Marvell is traded at a multiple of 100 for the coming year) will soon become cheap.
Radware's steep rise was accompanied by large turnovers. As far as I could tell, the high turnovers were not due to purchases by Israeli investors. A rumor has been circulating in the market for some time that after thorough testing, Cisco chose Radware's systems over its own products to be part of a large supply contract for a telecommunications company, because the performance of Radware's system was vastly superior.
A lot has been written recently about a huge contract for unified messaging systems that Comverse Technology (Nasdaq: CMVT) is about to obtain from Vodafone. Keep in mind that every one of Comverse's systems incorporates one of Radware's load-balancing systems.
The above recommendations were made by a person/s working in the investment industry, who may hold positions in securities mentioned in the column. This column should not be taken as advice to buy, sell or continue to hold any securities, and anyone acting on the advice of this column does so at his or her own risk.
Published by Israel's Business Arena on November 20, 2001