Adopt a contrarian style: 'Buy in May and go away'!

Even though we do not expect a straight-line recovery we believe that the coming weakness due to some profit taking does provide buying opportunities for selected cyclicals and technology stocks with an investment horizon of 12-18 months.

US Stocks

Current levels of the Dow, S&P and Nasdaq are at or below the levels when the Fed announced the rate cut. Profit warnings still dominate sentiment and additional rate cuts are necessary to sustain any meaningful rally. And they should be forthcoming, unless the economy starts to show signs of bottoming.

Price of gasoline has soared 15% in the last month. Refineries are operating at near capacity, so increasing the supply of gasoline will be difficult. Higher prices will become a drag on an already slowing, fragile economy. Consumers are already spending $125 billion a year on fuel, and a 25-cent increase in the price of gasoline would take another $20 billion out of people's pockets, hence further reducing consumption. No new refineries have been built in the United States since the mid-1970 partly due to environmental concerns.

Wall Street has shown that panic is an equal opportunity emotion. The panic to get out of the stock market, in particularly tech stocks, in February and March has gave way to a panic to buy in the last three weeks. A key catalyst for the recent rally was that more than a few tech companies said that the sales and earnings picture is at least stabilizing. But as long as capital spending remained tight, earnings recovery will be delayed.

Panic is an emotion that should not cloud one's financial decisions in an up and down market. Stay with companies that can sustain its margins with inelastic demand for its products like RJ Reynolds Tobacco Holdings (RJR $59.74) or oil companies like Exxon Mobil (XOM $86.10).

US Technology Stocks

Another relatively quiet week for technology issues. With the bulk of "blue chip" technology companies having completed their March-quarter earnings reporting, investors are appearing to be turning conservative again and locking-in profits especially after 3 weeks of strong price appreciation. Since the low of 1619 established on 4 April 2001, the NASDAQ Composite Index has rallied 32.5% (to 2146). We expect the market to enter into a profit-taking phase over the next few trading days and as such, we suggest investors who are sitting on good profits to look towards securing capital gains and sell a portion (40%) of their profitable investment positions. For investors who are invested in more conservative time deposits and are seeking higher returns through new investments into the US technology sector, we suggest to Hold in the near-term until the expected price weakness stabilises.

We continue to stay away from the PC hardware segment, as well as PC-related semiconductor companies, as we maintain the view that the segment will be under-performers for the year 2001. However, if "push comes to shove" then we would only accumulate (for 2002 investment performance) Dell Computers (DELL US, $24.93, CSFB rating: Buy) and Intel Corp (INTC US, $30.40, CSFB rating: Buy) when their respective stock prices stabilise at lower levels (see 3-tiered structured buying strategy). Though we avoid the segment altogether, we like DELL best as we believe the company is well positioned to maintain its market share leadership even in an aggressive PC price-war environment.

DELL's competitive advantage primarily lies with its direct sales model which enables the company to avoid channel inventory problems (ie inventory buildup among resellers) that plagues other players within the industry. According to Dataquest's preliminary 1Q01 PC results, DELL has overtaken Compaq Computers (CPQ US, $17.40, CSFB rating: Hold) for the first time, to take the top position in worldwide PC unit shipments. DELL's PC market share has expanded from 9.9% in 2000, to 12.8% in 1Q01. Also, DELL has taken the lead in US NT server shipments and has already successfully captured 26% of market share. Looking ahead, we expect stock prices for PC makers and related semiconductor companies to be depressed from current levels. Investors will shy away from PC hardware issues as the price-war escalates and further threatens narrowing margins. And, until consumer confidence improves from current levels, end-user demand for PCs will remain weak in the US and thus current high inventories will take a longer time to work its way back down to normal levels.

Europe

Among investors there is an old saying that says 'Sell in May and go away'. Even though there were only two trading days so far this month one could argue that it might well come true again after the nice rally in April. Indeed, we expect profit taking to result in a few weaker days or even weeks. However, this might well prove the above saying wrong this time, meaning this year it might be better to adopt a contrarian style and 'Buy in May and go away'! Over the last four weeks markets wanted to focus on the good news and hence sentiment changed significantly. The change in sentiment is likely to be sustainable as lower interest rates support valuation, cash is waiting to be invested and some US leading indicators imply that the economy starts to stabilise. Even though we do not expect a straight-line recovery we believe that the coming weakness does provide buying opportunities for selected cyclicals and technology stocks with an investment horizon of 12-18 months.

Energy stocks came under pressure after the API data reported an inventory build-up in gasoline, crude and total crude and production. This data came in much higher than expected and caused the WTI oil price to drop from USD 28.94 to 27.80 before recovering back to USD 28.45. Should this trend be confirmed over the coming weeks, oil prices could go lower and the OPEC might start discussing about adjusting production rates. Provided the OPEC sticks to its discipline and the economy is recovering we do not see the oil price declining below the USD 25, which is still above the average expectation of the market. We would use this weakness to buy TotalFina (TOT FP; EUR 157.20). Even though oil stocks are highly correlated to the oil price one must not forget that tough cost cutting programmes and high capital allocation discipline makes an improvement in earnings possible even with a lower oil price.

Vodafone (VOD LN; GBP 1.8925) went on a big shopping spree this week extending the company's dominance in wireless further. Vodafone benefited from BT's pressure to sell assets to reduce debts and bought BT's 20% stake in Japan Telecom and J-Phone and the 17.8% in Spanish Airtel for GBP 4.8 bln. The deal is financed with cash and the biggest ever share placement in Europe of GBP 3.5bln. Vodafone managed to place the shares within less than two days! Demand for the issue was so high that the size was increased by GBP 500 million. Strategically the deal makes sense, especially the Japan exposure is very important to Vodafone as it is the world's second biggest market and because of its technology know-how (3G). In terms of share price development the deal is negative in the short-term as it increases the supply of new shares further even though the high demand for the share placement underlines the high interest in Vodafone. However, as Vodafone also paid earlier acquisitions in equity and the lock-up period for these shares will soon be over the supply of new shares will remain high in the months to come and hence the upside is capped. We see any price below GBP 2 as an attractive buying opportunity but make it clear that investors need to take a long-term investment horizon.

We added Lufthansa (LHA GY; EU 20.72) to our recommendation list. Lufthansa is traded at a 23% discount on an EV/EBITDAR level compared to its peers. We believe that this is not justified given Lufthansa's excellent management. The company's 2001 fuel inventory is 70% hedged, its balance sheet is of best quality and the company has set financial targets for the different units to improve profitability. Unlike other players Lufthansa is not a pure airline business. The company is also exposed to catering, logistics and maintenance, which smoothen the cyclicality of the flight business to a certain extent.

Additionally Lufthansa is a key member of Star Alliance, which manages 21% of the global air traffic. Alliances are crucial for airlines since they will decide about the end winner. They continue to expand in size and density offering seamless, faster and more cost-effective travel. The main risk for Lufthansa is connected to the current wage discussions. On Thursday the pilot union announced a first round of strike as the involved parties could not find an agreement. We have incorporated an average wage increase of 20% in our numbers. We expect a strike to be of short nature, as it would hurt both parties. Our price target is fixed at EUR 25, which would reflect a discount of 15% to the sector. Airline stocks are cyclical and volatile and hence we recommend the stock as a trading idea for risk-aware investors.