Still cautious on US Tech, buy on dips

US Stocks

Alan Greenspan will appear before the US Senate Budget Committee to testify on the economy on Thursday. Over 150 companies will be reporting their quarterly earnings this week, and half of the DJIA component stocks will also be reporting this week.

The market should remain volatile, the FOMC meeting will be at the end of the month. The Chairman's view on the economy thus the monetary policy moving forward will be more important

Addition to the watch list, Citigroup Inc. (C US), which announced 4Q result better than expected. We expected on April 16th, 2002 an EPS 7.4% higher than the last one representing the 3rd consecutive growth The company has a global franchise well-balanced product segmentation. Is a good buy below $44.

The Gap Inc. (GPS US). is near its 52 weeks bottom. We suggest a buy below $14 for a turn around play.

CVS Corp. (CVS US). We think that the stock is undervalued and with a P/E of 15.25 the company should recover a level of $33 in the future. Below $26, the stock should be very attractive for a long-term investment.


US Technology


Intel, Compaq and Microsoft have reported last week, sending out some mixed signals. All of them have been quite cautious in stating their forecasts implying a slow corporate spending increase. Referring to the outlook given by the PC related companies, replacement cycles seem to become longer. This rises some more questions about a possible recovery of the sector, till now expected to happen by the third quarter of this year. Now, as a matter of fact, the downturn should be over. This is somewhat reassuring, but the shape of the recovery is the name of the game.

Talking about the recovery curve, we might have to expect a slower pace. It will neither be V-shaped nor U-shaped, but probably wide U-shaped. Even if there are some parameters that should support a recovery, like low interest rates or even the strong long-term fundamentals for technology as such, the NASDAQ Composite will stay in a trading range between 1500 and 2400, giving us some decent trading opportunities. All in all there is no fundamental reason that could provide a sustainable increase in the NASDAQ just right now. We would indeed not be surprised if the index goes back to the 1800 levels in the coming weeks due to some more uncertain outlook statements throughout the earnings season.

On this point of view we advise investors to keep their average technology investments as low as possible and to buy on dips in accordance with our forecast of share prices staying within trading ranges.

We would like to focus a bit on the software sector. Even if we do not expect software companies to raise guidance for the next quarter, especially not for the business application software (due to seasonal patterns), this sector should outperform the rest of the technology sectors helped by the strong earnings momentum on relatively high gross margins software provides. If an investment in technology has to be made we would favour the software sector and, in particular, security software. Network security companies are expected to present solid Q4 results pushed by increasing demand for security infrastructure. Verisign, which is on our recommendation list will report on January 24th (First call est. $+0.19). Another company we like is Checkpoint Software, but we would like to see the stock bottoming out before we consider buying it.


Europe

Optimists that had hoped that the 4Q01-reporting season would provide evidence of an earlier recovery of corporate earnings were disappointed last week. Industry bellwethers such as Intel, Microsoft and IBM issued rather cautious comments about the economic recovery but broadly met or exceeded earnings forecasts. We do not consider the current uncertainty as the end of the recovery that started last October. We view the current wobble in sentiment as a buying opportunity. We are encouraged by economic and earnings reports steadily showing signs of improvement and valuations coming back to more reasonable levels.

So far 107 S&P 500 companies have reported 4Q01 earnings and results are coming in above expectations. 62% of companies have reported above expectations and just 10% have announced results below. At the sector level we find that cyclicals and technology are providing the greatest positive surprises.
These results bode well with our findings in Europe. Our European earnings revisions scorecard shows that 12 of the 15 cyclical industries have shown an improvement in their earnings revision rank in January relative to December. The biggest improvers were mining, construction, forestry & paper and general retail. Among these sectors we recommend Lafarge (LG FP; EUR 98.80), Stora Enso (STERV FH; EUR 14.40) and Pechiney (PEC FP; EUR 59) even though the latter is not a real mining stock.

With many investors only just beginning to see improving sentiment in earnings, we believe the most recent pull-back in cyclicals provides a buying opportunity and is not the beginning of a longer-term downward trend.

The sectors to see a deteriorating rank include the defensives, software and financials.

Stora Enso (STERV FH; EUR 14.40) came under pressure after a report showed higher pulp inventories in Northern America. We do not believe that the rise has any significant impact on the paper industry's fundamentals. We are not concerned about the direction of pulp prices short term as the historical link between paper prices appears to have been cut. In contrast to pulp, paper inventories are in good shape (low), supply discipline is holding and as a result prices are holding up at healthy levels. We believe that rising pulp deliveries partially reflect a strong recovery in order inflow to European paper mills. Pulp is not important fundamentally but has a negative impact on sentiment for paper shares. Hence we recommend using the current negative sentiment to buy our preferred cyclical stock, Stora Enso, at current levels.

ASML (ASML NA; EUR 20.60) reported slightly disappointing 2001 earnings. ASML announced a loss of EUR 479 million or EUR 1.03 per share. The outlook of the company remained very cautious and the management reiterated that the recovery would not happen before 2H02. However, despite the cautious statement the stock's fall was probably more affected by Intel's cut in capital spending. While this will undoubtedly affect ASML negatively we would argue that ASML will not experience the full 30% cut of Intel's capital spending. ASML's strong product line in the 193nm and 300mm products will be the area where companies continue to spend. There were a few positive points in ASML's report that support our positive view on the stock, even if the story might be delayed by a few months. The average selling price (ASP) of new systems rose 18% last year, which should help to bridge the time until the recovery sets in. Additionally cancellations are easing telling us that the worst should be behind us. We think ASML is extremely well positioned to increase market share going into the next capex upcycle. ASML remains a must-own in the semiconductor industry.

During the annual shareholder meeting Siemens' CEO (SIE GY; EUR 72.35) said that new orders and sales had increased in the December quarter vs. last year. The IC Mobile unit probably broke even in this period and earnings might be significantly higher compared to the September quarter. Although concrete figures will only be released on January 23 we view Siemens' optimism as a good sign for the share price. Siemens remains a promising story with an attractive mix of cyclical and technology exposure. We see big scope for improvement and believe that the management is willing to unlock this potential. We reiterate our buy recommendation on Siemens with a price target of EUR 80.