Beaten-down stocks start to show value (page 1 of 3)

If we agree that the lesson to be learnt from the technology sell-off is that valuation is a matter of earnings and price then the current levels appear attractive for long-term investors. Admittedly that counts little in the current environment but it should make investors aware of the time horizon they choose for their investments. Under a long-term perspective investors should focus on stocks that are currently traded below their fair value.

US Stocks

Today, Feb-13-01, Federal Reserve Chairman Alan Greenspan will discuss the U.S. Economy and monetary policy in a testimony to the Senate Banking Committee. If he fails to convert the masses, then the market may trade lower or sideways until the next FOMC meeting on Mar-20-01. Meanwhile, the following is a list of stocks with cash returns of 5% or better. Free cash flow by definition is cash from operations minus capital expenditures, and the enterprise value is used as a proxy for the take over value of a firm. The ratio of free cash flow to enterprise value is known as the cash return. In an environment that rewards positive earnings outlook, free cash flow is preferred. While AE may have a liquidity problem, and for Pacificare, CSFB is looking for a loss in fiscal year 2001, the rest of the list can be considered as buys if the market corrects further.

US Technology Stocks

As anticipated, the market continued to take profits and head towards the 2300-2200 level (again) as investors revisit the earnings growth deceleration story.

Earnings release from Cisco Systems (CSCO US, $28.1875, CSFB rating: Buy) compounded negative sentiment during the week and re-ignited earning growth worries. CSCO reported weaker than expected results with 2Q01 EPS of $0.18 (First Call Consensus Estimates at $0.19 a share). Revenue grew less than expected (3.5% sequentially and 55% year-on-year) to $6.75 billion due to weak demand from US service providers, particularly CLECs and IXCs. With CSCO's management lowering guidance for 3Q01 performance, CSFB revised downwards their quarterly year-on-year EPS growth forecast for the company to be roughly flat (3Q01 EPS estimate at $0.13 vs actual 3Q00 EPS of $0.13). We expect CSCO to continue experiencing a difficult revenue growth environment over the next few quarters. However, with about $4.8 billion in liquid assets (cash and cash equivalents, plus short-term investments), a proactive management, and a strong leader in the data networking market, CSCO is well positioned to weather the "spending-slowdown-storm" and emerge as a more focused company with a broader array of energising products. While we like CSCO over the longer-term, we believe the company's stock price has the potential to continue weakening. As such, we do not recommend to buy the stock yet but suggest to wait for price to stabilise at around $25.00 before considering any accumulation strategy.

Added Oracle Corp (ORCL US, $23.5625, CSFB rating: Strong Buy) to Buy recommendation list. We like ORCL as the company's growth in database business (Oracle 8i, 9i, etc) is being driven by the explosive growth in corporate data volumes, Internet traffic, broadband and wireless communications, on-line transaction processing, data warehousing, eBusiness applications, eCommerce exchanges, and 7x24 operations. Also, we believe ORCL's vision of providing customers with an integrated stack of solutions is starting to take hold in the field. As the world's 2nd largest software company and the leading supplier of software for enterprise information management and eBusiness enablement, ORCL reported strong Nov-2Q01earnings with EPS of $0.11 (exceeded estimates of $0.10 a share).