During these last few trying weeks, in which the S&P 500 twice hit a five and half-year low, sinking to 850 points, an event took place which market professionals term "capitulation." This is an event which is identified in retrospect as the market's low, and it is taken to refer to the capitulation of the last of the investors that had still held on, but whose spirit had finally been broken by the sharp, ongoing falls, as if to say "I can't handle it any more." Investors like these sell at the lowest point of the downturn on markets, and the floor is said to have been reached once there aren't any more sellers to send them down further.
Tobias Levkovich, chief US equity strategist at Citigroup, says that this time, it's not just the investors that have thrown in the towel, but analysts have also been evidencing similar signs of the panic and capitulation that shows the markets have hit the floorboards. He explains that they have been downgrading their forecasts and recommendations to a far greater extent than they did during the panic that ensued in the aftermath of the September 11 terror attacks in 2001. On looking back 60 years, Levkovich finds that company profitability falls by 13% on average during times of recession, and during the exceptionally severe recession of 2001-2002, it fell by as much as 22%.
The analysts at Levkovich's own employer, Citigroup, for example, are working on the assumption of an average fall of 27% in the profitability of S&P 500-listed companies, compared with the peak they reached on the eve of the recession. According to him, some of other the forecasts on the market are even bleaker, with profitability expected to fall by 50%, twice what it was during the worst recessions in the past 60 years. Another sign of panic among analysts which, Levkovich believes, is usually indicative of an imminent turnaround on markets, is the fact that 80% of revisions in forecast were downward.
I have noticed the same signs of panic that Levkovich detected among the analysts when it comes to Israeli companies, too. I am at loss to understand how a company like Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT) could be given a target price of $6 on the basis of an earnings multiple of 9 for 2009, when the same model projects sales growth of 20% and 40% growth in earnings per share - up to $0.65. This looks to me like a case of an analyst covering his own back, and who cares about the investors.
If the figures projected by the model materialize, Ceragon will be deserving of a share price double or more than the one in the reviews, but the analysts appear to have panicked and are fearful that a bear market could send the share down to $4 -something that is undoubtedly feasible - but that would, I feel, mean that they had lost their professional integrity. They have set the multiple of 9 because of the market, as if Ceragon was operating in the moribund automobile sector. Incidentally, earlier this week an investment manager in the US was quoted on a financial news site as giving Ceragon a target price of $26 over the next two years on the exact same figures.
I noticed another case of analyst panic with a stock that I dropped from my portfolio, tracked by "Globes", some time ago, since I genuinely feel it is in a market that has stopped growing - wireless handset chip company DSP Group (Nasdaq: DSPG). Just before the company unveiled its results in early October, the analysts at Oscar Gruss and RBC decided that the battering the share had taken - down to $5, with net cash per share of $4.30 - was still not enough, and they downgraded their recommendation to "Sell" from "Neutral", a move that usually signals to investors that much worse is in store than that the market price indicates, and they would do well to make a quick exit. DSP Group's share subsequently soared 24% to $6.40 on the day the company unveiled it results, in which it beat the analysts' sales and earnings estimates.
Just as a capitulation by investors is followed by gains, so the panic among analysts and the wholesale downgrading also gives way to a turnaround, with a smattering of raised recommendations here and there. One of the sectors that took the hardest knocks from the analysts during the recent market collapse was the chip sector, which was mercilessly pummeled as if there were no tomorrow, and chips will no longer be featured in every item, from aircraft to key rings.
Citigroup draws our attention to the slump the chip sector experienced in 1990-1991, and claims that the situation today is similar to what it was back then when there were chip stocks pushed ahead of the market with twelve-month returns of up to 43%, even though the recession only began in 1990. They recommend that investors buy a long list of chip makers such as Intel Corporation (Nasdaq: INTC), Qualcomm Inc. (Nasdaq: QCOM), Marvell Technology Group (Nasdaq: MRVL), Broadcom Corp. (Nasdaq: BRCM), NVIDIA Corp (Nasdaq: NVDA), STMicroelectronics NV (NYSE: STM), and Integrated Device Technology Inc. (Nasdaq: IDTI), of which the last three were rated "Neutral" by Citigroup and have now been upgraded to "Buy."
Chambers gets down to business
On the other hand, the much maligned SanDisk Corporation (Nasdaq:SNDK) has now been given a reprieve by Goldman Sachs after a tough period out in the cold. Having suspended coverage after it advised the company on the sale talks with Samsung, which didn't really go anywhere, Goldman Sachs has now resumed coverage of the share with a "Buy" recommendation and a target price of $13. This amounts to an indirect notice that that there is no longer any contact between the two companies.
The bottom line in Goldman Sachs' review is that the failed takeover has greatly strengthened the patents that SanDisk holds, and on which Samsung is likely to continue paying royalties to the tune of hundreds of millions of dollars after August 2009. The uncertainty over what will happen in the summer of 2009, leads Goldman Sachs to set a target price of just $13, but should a deal be signed, the proper price will be far more than $20.
Tomorrow - after the elections and trading - Cisco Systems Inc. (Nasdaq: CSCO) CEO John Chambers will report on the quarter ended in October. He will be the first of the managers of the technology giants to give some color to Black October from the business perspective, and not just in the context of share prices. As one of the campaign managers of Republican presidential candidate Senator John McCain, his conference call tomorrow night will be interesting, beyond the election results themselves, which, as usual, will have a critical impact on the direction technology stocks are likely to head in.
If McCain becomes president, Chambers will have to ward off the rumors, which for investors will be a nightmare, that he is to leave Cisco to take a position in the McCain administration. If it is Obama that will be entering the White House in January, Chambers will undoubtedly be delivering a message about how companies like Cisco can serve as catalyst for extricating the US from the quagmire of recession, since he is known to be a strong believer in the fundamental correlation that exists between technology investment, which drives growth in productivity, and faster economic growth.
Published by Globes [online], Israel business news - www.globes-online.com - on November 4, 2008
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