Defensives and selected cyclicals are the preferred stocks (page 1 of 2)

US Stocks

In the last couple of weeks, we have been using financial ratios to see how a commonly held list of stocks compares with each other; the list consisted of both technology as well as non-tech shares.

In this final installment, we have consolidated them, and added a fourth category, which is the past 5 quarters inventory turnover rate:

-R&D to net sales
-R&D to operating cash flow
-Cash return
-Inventory turnover

In terms of inventory build-up, it is interesting to see the two companies with the largest deterioration in turnover rate were biotechnology companies, namely, Amgen and Biogen. Others that showed slower signs of turnover are - Cisco system, Broadcom Corp., and Lucent Technologies. But we do not see an across the broad weakness, perhaps the decline will only come in the first and the second quarter of this year.

The top twenty stocks from each category are as follows:

Microsoft Inc. (MSFT $56 11/16)
Boeing Co. (BA $60.10)
Intel Corp. (INTC $29 5/16)
General Electric (GE $44.57)
Computer Associates (CA $29.65)
Eastman Kodak (EK $43.98)
Cisco Systems (CSCO $22 3/16)
IBM (IBM $102.30)
Oracle Corp. (ORCL $16 7/8)
3M (MMM $111.33)

The above stocks should be considered as long-term buys.

US Technology Stocks

On a week on week basis, the NASDAQ Composite Index declined 6.4% to 2117.

With a recovery in economic growth rates in the US still an uncertain event, business confidence remains weak and has continued to prompt corporate decision-makers to hold tight onto company wallets. With corporate "purse-strings" drawn excessively tight, a menacing "IT-liquidity-crunch" virus has been spawned and has spread like "wild fire" across companies in the US.

This latest virus has the ability to delete or dramatically scale down corporate IT spending programs and subsequently amplify to erode earnings potential for technology companies all along the food-chain. And, Oracle (ORCL US, $16.875, CSFB rating downgraded to Buy) has been it's latest large-sized public victim.

Last week, ORCL warned that it would miss 3Q01 EPS ($0.10 versus $0.12 expected) and revenue ($2.67 billion versus $2.92 billion anticipated) estimates due to weak business sentiment that caused several deals to be delayed at the last minute. Though the lower growth scenario was not completely unexpected, investors were nevertheless shocked by the magnitude of the decline. ORCL highlighted it's software sales, which were approved by the customer's mid-level management, failed to get final approval from top-level executives on concerns about the economy. The surprise shortfall was due mainly to weaker sales in the US (57% of total sales), with sales in Europe (29%) and Asia Pacific (14%) remaining healthy.

With sentiment weak across all technology issues and near-term demand visibility limited, we remain cautious ahead and recommend taking a conservative approach to accumulating technology stocks. For the week ahead, we expect sentiment to remain depressed and we believe ORCL's stock price has the potential to trek lower towards $14.00. As such, we have revised our recommendation on ORCL to a near-term HOLD.

For those who followed our suggestion of exploring a 3-tiered accumulation on ORCL (CS Weekly, dated 26-Feb-01), we recommend to HOLD and wait for further price stability before considering to accumulate more.

T1 = 1st tier buy level
T2 = 2nd tier accumulation level
T3 = 3rd tier accumulation l

Europe

Hopes of an early US rate cut by the FED proved to be wrong dashing the market's only hope to find a bottom.