Tech stocks to remain volatile, take profit where possible (page 1 of 2)

US Technology

While investor sentiment has definitely improved over the last few weeks, investor risk appetite has also expanded on the hope for an earnings recovery in 2002. We expect earnings to improve more in the 2H02 than anytime earlier. Also, we expect technology stock prices to remain volatile ahead, and as such we continue to suggest taking-profits where possbile.

Ciena Corporation (CIEN US $14.26 CSFB rating: BUY) announced a 4Q01 net loss of $1.8 billion with EPS of $5.51. Though CIEN's 4Q01 sales totalled $367.8 million with EPS of $0.05 (up 27% from last year), the firm's increased research and development spending combined with a $1.7 billion charge (goodwill-impairment charge, restructuring costs, deferred stock charges, payroll taxes on stock-option exercises and amortisation of goodwill) wiped out its gains, and caused the firm to fall into negative territory.

Although the firm's news seemed to have dropped a bomb for the entire technology sector, CIEN still believes that its overall 2001 performance was good considering the general state of the economy and the dismal telecom sector.

CIEN is anticipating gloomy future forecasts for 2002, with revenue to decline 30-40% q/q in January with further declines in April. We suggest to avoid CIEN for the time being until it's stock price stabilises further at around $12.00.

Qwest Communications Intl Inc (Q US $12.33 CSFB rating: BUY) said it plans to cut its workforce by an additional 7,000 jobs along with its fourth quarter and full year growth outlook for 2002, as it has yet to see the demand for its voice and data services to bottom out.

The company warned that its 2001 revenues for the full year would come in at $19.8 billion, below analyst expectations of $20.3 billion. Net loss for 2001 is now expected by the company to fall in the range of $2.30 to $2.38 a share. Looking into 2002, Q now expects revenue to be in the range of $19.4 billion and 19.8 billion, again below analysts' estimates of $21.11 billion. We recommend to avoid Q as we believe the stock is trying to establish a firm floor above $11.00.

Europe

The recent profit or sales warning from companies such as Merck, Bristol Myers, Cap Gemini, Logica, Lucent, Ciena etc. have brought valuations back into investors' minds. While some more optimism for next year is definitely warranted these cautious comments underline that an economic recovery will not occur as a V-shape recovery. We consider last week's setback as a healthy sign of the market that it is aware of valuations. The market is currently in a typical consolidation mood and as long as indices do not drop too much on bad news we view it as a positive sign that the market wants to go higher.

We continue to follow our cautiously optimistic investment strategy for 2002. Investors should use weakness that could occur early next year to build up equity positions. We believe that the low level of interest rates and the fiscal measures taken this year will finally cause the economy and earnings to recover. In terms of valuations European equities are traded at a discount to the US market. Even though the European economies will lag the US recovery it will be perception of better times ahead that will lead equities to recover.

As the economic recovery remains our base case scenario we continue to stick to our preference for cyclical stocks into next year. We would also reiterate our positive call on pharmaceuticals.