Investment is not only a long term game, but also a game of odds

US Stocks

The markets were crunched for a second time this year, the first being back in March and the recent one started from September. Except this time around, there may not be a quick recovery because the economy is weakening and more earnings disappointments loom. Although the Fed is relieved that the tech bubble has been burst and the economy is slowing, it still reiterated that it has a tightening bias in the last FOMC meeting on Nov-15-00. This will only change if inflationary pressures have reversed. The economy continues to grow though at a slower pace, meanwhile, oil prices are still hovering around the yearly average of $30.00 and it is early winter.

With the markets testing the lows again, investors are looking for a bottom and a rebound is expected giving rise to trading opportunities. An exclusion risk exists - the risk of not being in the winning asset at the right time. Preoccupation with this type of risk drives much of investors' behavior. Investment is a game of odds - one wins by selecting good quality companies with potential growth and a well-diversified portfolio. Not by decreasing one's odds chasing after the flavor of the month, or speculating on which stock will rebound the most in the upcoming rally (if there is one). Far too often, investors lack the discipline to take profit at the predetermined target, invariably hold out for a higher price and inevitably the stock would drop below the entry price. A frequent problem is that investors have portfolios with characteristics that do not match their performance expectations. That is why setting the investment goals & objectives and adhering to it, is vital.

US Technology Stocks

The technology sector remains out of favour and continues to look gloomy for the rest of 2000. However, we believe the current environment helps set a healthy price floor (expect 2600 to Hold) and has encouraging implications for enhanced performance in 2001. Looking ahead into 2001, we expect performance on NASDAQ to be back-loaded. We expect sentiment to remain jittery and stock price performance to be capped in 1H01. Nevertheless, we believe improved visibility and a recovery in earnings growth potentials to occur in 2H01; thus soothing nervousness and subsequently supporting stock prices higher.

On a week-on-week basis, the NASDAQ Composite Index declined 9% to close the week depressed at 2653 as improving sentiment was shattered by Microsoft's 2Q00 (Dec) profit warning. For the week ahead, we expect NASDAQ to consolidate between 2600 and 2900 as investor sentiment focuses on macro events like the Fed meeting and US economic data releases.

Positive on Oracle Corp (ORCL US, $28.56). ORCL reported encouraging 2Q01 results with EPS of $0.11, beating consensus estimates of $0.10 a share. Total revenues grew 18% sequentially and 15% yoy, to $2.7 billion. License revenue increased 39% sequentially and 19% yoy (to $1,118 billion), while services revenue climbed 6% sequentially and 9% yoy (to $1,541 billion). Presently, ORCL has about 83 customers using its eBusiness suite products (from 15 in 1Q01) and has shipped its Oracle 11i licenses to 3,000 customers. We believe ORCL's applications revenue has strong potential to continue generating good growth. The company is well positioned to maintain revenue growth by tapping into its installed base of 10,000 applications customers, as well as attracting new customers with its "one stop shop" eBusiness applications strategy. We like ORCL but we do not recommend to "chase" the stock at current levels. Rather, for investors who are looking to buy ORCL, we recommend accumulating the stock at $25.00 (12-month price target at $36.00).

Remain Underweight PC stocks and PC-related issues. Last week, Microsoft Corp (MSFT US, $49.19) warned (for the 1st time ever) that they were lowering estimates for 2Q01 due to (1) a deceleration in consumer PC sales, (2) soft spending for corporate workstations, (3) slow demand for Office productivity software and (4) weak on-line advertising. The launch of Windows 2000 and Back Office 2000 failed to spice up sales growth as IT spending did not take off as much as desired. Looking ahead, we believe MSFT's revenue stream will be hard pressed to grow as attractively as before given the continued slowdown in corporate IT spending and PC purchases. Nevertheless, we look forward to 2H01 for more performance guidance into the company's new products: (a) Whistler operating systems, and (2) Office 10, that should help reaccelerate revenue growth. For the time being, we recommend investors to avoid the stock and instead, look to reduce exposure to MSFT on any price strength.

Europe

It is downgrading season! Despite no significant profit warning of major European companies an increasing number of European analysts started to downgrade ratings and earnings forecasts of European technology and banking stocks. It seems obvious that the global economic slowdown and reduced capital spending will affect these companies too. We believe that this is a prudent, though late, step to reflect the deteriorating outlook of most growth sectors. In general we are not surprised about this development since 2001 earnings forecasts for European companies have remained stubbornly in the higher teens. With 2001 earnings growth of US companies to be expected below 10% European expectations have been clearly too high. Even though we admit that the extent of the economic slowdown can still not be foreseen at the current point in time we believe that these downgradings reflect a belated validation of what the stock market has already priced to a large extent than an anticipation of what will follow. Even though we do not expect a significant and sustainable rebound in equity markets over the next few months we feel that the current volatility offers attractive trading opportunities.

We would use strong pullbacks like last week's to buy battered top-quality stocks with the intention of taking profit after a 10% 'relief-rally'. We believe that markets could rally sharply on the back of positive news but view the current market condition as too unstable to expect a sustainable recovery. This week's FOMC meeting might provide the incentive for such a short-term rally if the tightening bias is removed. Investors with a longer-term investment horizon (12 months and more) should not chase any stock and patiently wait until stocks have reached their entry level. We continue to believe that top-quality bank & technology stocks will outperform the market in a 12 months view. Investors should not try to catch the bottom but adopt a two-step strategy in order to keep some cash at hand, should economic data get worse.

European banking stocks saw a triple-whammy this week with a prominent broker downgrading the sector, the Bank of England warning of increasing telecom debts and JP Morgan-Chase issuing a profit-warning. We believe that the current market sentiment contains too much pessimism and consider the valuation of these stocks very attractive. Our top-picks at these levels are UBS (UBSN SW; CHF 254.50), ABN Amro (AA NA; EUR 24.29) and Deutsche Bank (DBK GY; 84.35). In the short-term, though, we expect these stocks to trade in line with economic data and to remain volatile.

ING (INTNC NA; EUR 79.78) reflects a very interesting mix of banking and insurance. We believe that the stock looks very attractive at current levels after the divisional structures in the US have been put in place. They will help to maximise the potential of the integration of the Aetna, ReliaStar and ING Businesses. We also feel that ING's strong growth in Far East, Asia and Emerging Europe (approx. EUR 3.9bn premium) is underestimated by the market. The fact that the asset management business now runs third-party funds should provide an additional revenue stream. Our target of EUR 90 seems rather conservative and bears upside potential.

After rallying sharply early in the week, Philips (PHIL NA; EUR 39.96) and STMicroelectronics (STM FP; EUR 50.60) declined on the back of earnings downgrades by CSFB. STM was downgraded from Strong Buy to Buy while Philips was reiterated 'buy'. In general, these downgrades bring earnings forecast much more in line with the current consensus. A weak PC application and a widespread inventory correction cast a marked shadow upon the sector outlook for 1H01. However, CSFB maintains its positive stance on a 12-month timeframe. While we cannot deny that these two stocks will be negatively affected by the current slowdown in the industry we believe that both companies obtain an outstanding relative positioning.

Philips as well as STM have a reduced exposure to the PC segment and a balanced exposure to consumer, automotive, wireless and telecom. Computing accounts only for 15% and 20% resp. of Philips and STM's revenues of which most comes from peripheral devices. Based on the new forecasts STM now trades at a PE-Growth 01 ratio of 0.83x and Philips at 0.96x, which, given the excellent quality of the two companies, look very attractive in a medium-term view. We believe that the current levels are attractive, not only from an investment point of view but also under a trading aspect. In order to take the reduced forecasts into account we reduce our price target to EUR 73 from EUR 80. We recommend buying Philips below EUR 40 with a short-term trading target of EUR 46. STM looks attractive below EUR 50 with a short-term upside to EUR 57. We would be slightly more cautious on Infineon.


General disclaimer:
This document has been prepared solely for information purposes and for the use of the recipient. It does not constitute an offer or an invitation by or on behalf of Credit Suisse to any person to buy or sell the security. Any references to past performances is not necessarily a guide to the future. The research and analysis contained in this publication have been procured by Credit Suisse and may have been acted on before being made available to clients. For further information, please contact your investment advisors or Investment Consulting.