Waiting On A Friend
Tech stocks are on trial after the bell today, as its hero steps before the jury disheveled, battered and feeling only a fraction of its former self (55.31% of its former self to be exact). With earnings winding down and economic data on the lighter side this week, Cisco Systems (NASDAQ:CSCO) takes center stage as investors try to decide which way the NASDAQ is going to head in the short run.
Headlining after hours action, Cisco actually missed earnings estimates of $0.19/share, coming in with earnings of $0.18/share. This is the first time in 14 quarters that Cisco missed estimates. Cisco also disappointed with its top line revenue number as well, coming in with revenues of $6.75 billion as opposed to estimates of $7.11 billion. In addition, inventories were up 25% sequentially and John Chambers said he is "cautious" about the "brief pause" in the economy.
The big networking company has an effect on more people than are probably aware, since it is owned by thousands of mutual funds. Moreover, it makes up about 7% of the NASDAQ, so we may be in for a rough ride in techland tomorrow.
In addition to Cisco's news, we received good news on the M&A front, with the Justice Department's approval of the JDSU Uniphase (NASDAQ:JDSU) and SDL, Inc. (NASDAQ:SDLI) merger. Its been a long time in the making, with SDLI shareholders certainly wishing that the merger was consummated months ago when JDSU was trading at almost three times today's closing price of $51.81. The $18 billion merger ($41 billion when it was announced last summer) will finally go through since JDS Uniphase has agreed to sell off its Zurich manufacturing plant to Nortel Networks (NYSE:NT) for $3 billion.
This merger approval has created a juggernaut within the fiber-optics arena. By acquiring SDLI, JDSU has proved to investors that it will continue to do whatever it takes to remain on the cutting edge of its industry.
The above merger serves as an excellent segue into my thoughts behind why the tech sector is not going to race back to its March highs any time soon, but instead remain in a fairly wide trading range.
Tech stocks trade on uncertain future cash flows. These cash flows are uncertain because the tech industry is extremely fast moving. Who knows where we will be in three years let alone in six to seven years? All a tech company can hope to do is remain ahead of the innovation curve. It does this by buying up small companies who are designing the "next" big thing. Sun Microsystems (NASDAQ:SUNW) has used this strategy to grow earnings, as has Cisco, Microsoft (NASDAQ:MSFT) and the above-mentioned JDS Uniphase.
The problem with the current tech downturn is that stock prices are no longer at levels that enable mergers to take place. This is because tech companies commonly use their stock as currency in a merger.
In addition, with the recent M&A craze having just ended last year, many tech companies have increased their share float, a result of issuing more stock in conjunction with the mergers. Companies traditionally institute a systematic share buyback program after mergers to prevent their shares from getting diluted. Just imagine how many shares outstanding a Cisco would have if it didn't repurchase on the open market after its multiple acquisitions over the past three years!
Bottom line to all this is that tech companies are currently strapped for cash due to the economic downturn and have suspended many of these systematic buyback programs. Guess what happens when a Cisco or a Sun Microsystems stops buying millions, even billions of shares over a period of time on the open market? Right. The natural "floor" or "support" disappears and so do the sky-high stock prices.
This spiraling downturn becomes a cycle that is only remedied when tech companies re-grow their earnings to the point where their stock prices rise enough to commence "buying" growth again. It takes time, of course, to grow earnings without the aid of acquisitions, but the recent rate cuts should help and are aimed at speeding up the cycle and getting us back to a healthy M&A environment.
The NASDAQ (COMPX) held up fairly well considering most market participants were sitting on their hands, waiting for the news out of Cisco. The index moved up 21.28, or 0.81%, to close at 2664.49. The morning optimism in the big cap techs made way for afternoon pessimism, as the NASDAQ slipped away into the close. Volume came in at 1.7 billion shares. Advancers beat decliners 2015 to 1772.
The DOW (INDU) spent the afternoon above the 11,000 mark but couldn't hold on, ending the session down 8.43 to 10957.42. The financial stocks were a drag on the old-economy index all day and picked up steam on the downside towards the close. DOW component J.P. Morgan Chase (NYSE:JPM) finished off $2.32, to $52.28 and American Express (NYSE:AXP) closed down $1.42, to $46.99. Breadth remained positive, with NYSE advancers beating decliners 1662 to 1401.
Bond prices weakened after a worse than expected auction of 5- year notes dampened buyers' spirits. The benchmark 10-year treasury ended off 9/32, to yield 5.21% and the 30-year bond closed down 11/32, to yield 5.51%.
Stocks and Sectors on the Move
It wasn't all tech in the news today. The oil service stocks gushed higher amid wide spread optimism of increased exploration and heightened pricing power throughout the industry. The Philadelphia Oil Services Index (OSX.X) has just broken out of a double bottom formation, as have some of its component stocks. Weatherford Int'l (NYSE:WFT) posted a new closing high of $52.99 after rising $2.49 today. Tidewater (NYSE:TDW) also broke out of a wide base formation, having lifted $1.04 to close at $50.00.
Late Monday, Etoys (NASDAQ:ETYS) was the latest of the dot- coms to essentially call it quits. The e-tail company announced that it has finally given up hope of funding from a potential buyer. Being a new dad, this news hit home. Going to the toy store is a treat, but it was just too darn easy to order up the latest dolly on-line and have it come to the door. Besides, when we take a trip to the toy store, guess who ends up with the most toys? Anyway, ETYS is still talking with Goldman Sachs (NYSE:GS) about a possible merger or restructuring. Keep your fingers crossed.
The AMEX Biotech Index (BTK.X) bounced off oversold levels today, rising 23.09, to close at 60.3.97. The index has been putting in lower highs and lower lows since November so it probably isn't time to take the plunge just yet. A standout on the day, however, was Immunomedics, Inc. (NASDAQ:IMMU). The company announced that it received a patent extension on its cancer-fighting antibodies. The company has licensed the antibodies for use by Amgen (NASDAQ:AMGN) to fight non- Hodgkin's lymphoma. IMMU closed up $1.69, or 11.25%, to $16.69.
Looking Forward, Always Forward
We don't get much in the way of economic news until the Initial Jobless Claims, which is reported Thursday. However, investors will have their hands full dealing with the news out of Cisco. We shall see if the earnings news will be shaken off, like so many other misses this last quarter or if investors will focus on the report as further proof of an economic downturn.
A gap down in the COMPX tomorrow, followed by a strong recovery would go a long way to at least holding the NASDAQ in its upper trading range in the short run.
Trade has been healthy in tech recently, but we certainly don't get the feeling that all the big institutional buyers are on board at this point. Volume on down days in tech is telling us that investors are still skittish and not willing to hold through bouts of uncertainty.
I think this next month or two will be defined by sector rotation, as investors react to economic news and rate cuts. The key is going to be to stay ahead of the rotating and to remain nimble. Keep profit and loss targets tight and keep your eye on the financials and retailers to see if investors still believe that the Fed will be able to drag us out of the doldrums.