Ned Riley
Ned Riley
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There's skepticism out there. Companies are extremely cautious about giving a decent outlook. They've set a much lower level of expectation for the public and the analysts out there.
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We're looking at a company that's going to grow, I think, at about 14 percent over the next several years with, I might add, a lot of predictability and I think a lot of visibility and a high level of confidence, ... So with Merck at 31 times earnings now and down about 20 percent from its high, I think we're getting into an opportunity where it's a lot better than trying to buy a cyclical that's selling at 27 times earnings and where the visibility is a lot more questionable.
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It was a year of awakening for the new investor on Wall Street and it was a very quick and sudden reversal of fortunes for many. We ran the emotional gamut from total irrational thinking and perception to reality and capitulation. Last year's market did reinforce the notion that abuses and excesses are eventually corrected and eventually reach a level of overreaction -- and that's how the year ended.
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It's a conviction on the part of some that a lot of the stocks have reached such a downside level that they are discounting the worst of all scenarios. The enthusiasm is clearly restrained because the selling and anxiety continues so we've got a little short covering and selective buying.
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We do have a little bit of a role reversal. The vulnerability is that (tech) stocks are priced at such levels that any disappointment leaves investors with a quick and sour taste in the mouth. Today's action reflects a little insurance being taken out that if somebody falters, it will bring the others down.
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I think they're waiting for Cisco, but they're also injecting their own level of certainty about the third quarter as being the turning point for the front end of technology stocks,
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I like Merck, in particular, because here's a stock that's retreated dramatically from its high, but still has its earnings growth-rate intact, ... This company, I think, can grow about 13 to 15 percent. And its price-to-earnings ratio now is getting down to a level that I think is very reasonable relative to its long-term growth rate.
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What's going to be key over the next week and determine how stocks perform is the interplay of pre-announcements versus brokerage upgrades. The corporate news will become more relevant than the economic news as we get closer to the period of quarterly reporting.
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The rocky road to recovery has some potholes.
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These companies are boxed in by poor past forecasts and lack of visibility.
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These companies are actually growing, ... The whole group is growing somewhere between 10 and 13 percent relative earnings growth and the price-earnings ratios are about 13 to 14 times. It's one of the few groups out there that are actually selling at their growth rate in terms of price-earnings ratio. And, right now, it's strange -- people don't like the group. It isn't a hot group.
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The smartest thing a company can do is take anything that they think might be questionable and disclose it now,
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Things like Dell Computer or Microsoft or Cisco Systems, all have one characteristic: They have enough cash to go through a period like this and come out smelling like roses,
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The worst point of the tech cycle is probably upon us now, but the actual results and the commentary on earnings are no surprise. There's a selling exhaustion in regards to tech stocks. People are trying to focus on the road ahead. Looking forward; there is a lot of upside potential.