By Gene Marcial Sure the market is scared witless that a recession is looming. But some top equity strategists are already looking beyond such negative sentiments and are aggressively accumulating stocks they think represent compelling value, and which they're sure will lead once the market turns. They think big investors are starting to rid their feeling of despair and beginning to embark on the road to long-term optimism.
One such bull is Joseph Battipaglia, chairman of the investment policy committee at New York investment bank Gruntal & Co., who thinks the market's brutal pummeling of stocks has provided investors with a great bargain-buying opportunity. The sectors that he thinks deserve immediate attention: Technology, financials, and health care. The areas he would avoid: utilities and energy.
While most investors have turned against the widely followed big-cap technology, telecom, and semiconductor stocks, Battipaglia and other bulls are embracing such fallen giants as Microsoft (MSFT) and Sun Microsystems (SUNW), WorldCom (WCOM) and Qwest Communications (Q), and Applied Materials (AMAT) in the semiconductor group.
LIGHTS GOING OUT? Battipaglia is banking on technology to continue to be the economy's driver. Advanced technology powers productivity, which is the linchpin of the New Economy, he says. Analysts have been scaling back their earnings estimates on tech companies like "the lights are going out on this group," he notes. Business capital spending will continue at a decent clip, he says, partly due to upgrades of information technology and equipment.
Michael Murphy, editor of California Technology Stock Letter, says despite the slowing world economies, technology is still growing relatively rapidly. The same people, he says, who laughed at the original 21% growth forecast in 2000 by the Semiconductor Industry Assn. are now saying there'll be zero growth in 2001. Growth in 2000 actually jumped 37%, notes Murphy, and the SIA is forecasting a 25% increase this year. "We suspect the SIA is closer to the truth," he says. After all, digital cellular phone sales will jump from 400 million handsets in 2000 to 520 million in 2001, figures Murphy. He estimeates that PC sales rose about 15% in 2000, and should climb 18% this year.
Microsoft has broad-based applications, a solid operating systems position, and is rich in cash reserves that it can use to make acquisitions. Currently trading at 53 a share, Battipaglia thinks Microsoft is headed toward 70. Battipaglia is betting that Microsoft under the Bush Administration will work to settle its protracted antitrust case. Sun Microsystems, he says, is the "ultimate Internet server and operating system software company" and is very inexpensive at a price of 31. He thinks Sun is worth 50.
TELECOM RECOVERY? WorldCom is essentially the premier Internet service backbone provider, and at 21 a share, is a real steal, Battipaglia says. He thinks the stock will shoot for 30. Qwest is a terrific play on the recovery that Battipaglia expects in the telecom service sector. The stock is now at 46, and he thinks 55-60 is an easy shot for it.
Applied Materials has been downgraded by most Street analysts, notes Murphy, but he disagrees with their move. He sees such chipmakers as Intel increasing their capital spending to upgrade wafer-making equipment to further improve the efficiency and performance of chips. Murphy rates Applied, which has risen in recent weeks from 38 to 44 despite negative analysts rating, as a buy.
Among the financial shares, Battipaglia thinks the world of Goldman Sachs (GS) and JP Morgan Chase (JPM). Goldman Sachs has a broad global capital markets presence, he says, and is still undervalued at its current price of 113. "We think Goldman shares are worth 150, at least." JP Morgan, recently acquired by Chase Manhattan, is a "strong multicenter financial institution with a successful merchant-banking profile," says Battipaglia. While the stock is now trading at 52, his target is 70.
SENTIMENT SWITCH. In health-care/pharmaceuticals, Battipaglia's top pick is Pfizer (PFE). This drugmaker's product pipeline, he notes, is full, and its earnings will continue to move up at a 25% growth rate. The stock, now at 40, deserves a price of 60, he says.
One major factor behind Battipaglia's optimism, he says, is the big switch in sentiment coming from Chairman Alan Greenspan and the Federal Reserve Board, from a tightening bias to an accommodating, looser stance on monetary policy. He also thinks energy prices are starting to moderate -- despite oil's most recent move up -- after hitting peak levels several months ago. And inflation, he notes still has yet to rear its ugly head.
These, says Battipaglia, are all very positive factors for the market's long-term outlook because they should enhance the earnings and interest rate picture. Marcial is Business Week's Inside Wall Street columnist