Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

Climbing the "Wall of Worry"

The market today has many similarities to that of the last Bush Administration, with a continuing rally despite a Mideast war and recession, according to Peter S. Cohan, president of Peter S. Cohan & Associates. Cohan is a technology investing strategist and the author of e-Stocks: Finding the Hidden Blue Chips Among the Internet Impostors.

Cohan points out that this market phenomenon is known as climbing the "wall of worry." Investors may be looking six to eight months out to better times, he says, although an X factor of uncertainty in the war on terrorism still exists. In the meantime, however, his own firm's index of Internet stocks is up 88% since its post-September 11 low.

Among those Net stocks, Cohan's favorites include companies offering software for Web sites, specifically BroadVision and Macromedia; and Internet security companies, an area where he names Internet Security Systems. If he were pinned down to buying only one stock, he says it would be Check Point Software, for its strength in computer network security. Interestingly, he isn't a big booster of such tech-sector darlings as AOL Time Warner, EMC, and Oracle.

Cohan made these and many other comments in a chat presented Oct. 25 by BusinessWeek Online on America Online. He responded to questions from the audience and from Amey Stone and Karyn McCormack of BW Online. Edited excerpts from this chat follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.

Q: About today's market -- why do you think we had such a strong day when it started out so weak?

A: Well, I think it's very interesting. It reminds me of the way the market was about 10 or 11 years ago, during the last Bush Administration, when we were at war in the Middle East, and we were in a recession. The Fed was cutting interest rates, and despite bad economic news and war-related fears, the market seemed to climb what they call the "wall of worry."

And what's been happening in the last several weeks has been a phenomenal rally in the Dow, the Nasdaq, and the Internet index. In fact, the Dow is up about 17% since its post-September 11 low. The Nasdaq is up 28%, and the Internet index is up 39%. I will add that the Peter S. Cohan & Associates index of Internet stocks is up 88% since the lows.

Q: Peter, you mentioned the Internet stocks have rallied in the last few weeks. Any groups in that area that are particularly strong? And why?

A: Yes, there are two areas in particular that seem to have jumped quite a bit. The first one that I think is really interesting is the whole broad area of Internet software tools. This is software that's used to build Web sites, particularly in the business-to-business area -- companies like BroadVision (BVSN), Inktomi (INKT), Macromedia (MACR) (I own shares of Macromedia). That overall segment is up 112% in the last few weeks.

Another area that is up 84% is Internet security software. Probably the best performer in that area is a company called Internet Security Systems (ISSX), whose stock is up 240% in the last few weeks. It went from $8.35 to $28.35. Now, as far as why those particular segments are up, I think the Internet security one is perhaps more obvious. I think it's because companies realize security in general is crucial.

Companies are realizing that eliminating paper in the supply chain is not just a matter of efficiency. It could be a matter of life and death. Paper could be a vehicle for spreading various biological agents into a company, and automating the communications between companies, and putting things online instead of on paper, could help increase the security of a company.

Q: Do you see EMC

losing more business to IBM

and other storage companies?

A: Yes. EMC, I fear, is in a downward spiral that unfortunately reminds me of other New England companies in the past, like Wang and DEC, which at one point were in their markets and basically became arrogant and ignored competitive threats, to their ultimate regret. Wang went bankrupt and reemerged as a consulting company. DEC was acquired by Compaq (CPQ).

EMC was able to keep its prices much higher than the competition because it had a superior product. However, Hitachi (HIT), for example, is offering products with comparable functionality at a competitive price to EMC. So EMC is in a very difficult position.

Q: Your thoughts on the future of CMGI


A: That is a very sad story. Basically, it's another one of those cases where you have all the signs of a typical New England company that gets too full of itself. For example, Dave Wetherell of CMGI was considered a genius for some time, and the stock did really well. But when the whole Internet boom began to fall apart, people began to realize that CMGI was a money-losing company with a bunch of portfolio-building companies that were losing money.

Another thing is that CMGI has naming rights to the local stadium, and whenever you see a company putting its name on a stadium or building an opulent corporate headquarters, that's usually a sign of impending disaster. Having said all that, on the plus side, CMGI stock has almost tripled since its low of 60 cents a few weeks ago, to $1.77 -- though that is a bit lower than $138.44 a year ago!

Q: Just one stock -- what would it be?

A: I'll stick with the Internet area. Of all the companies I would look at here, I would say my favorite is probably CHKP

(Check Point Software). I don't own this stock, but I think it's probably the best company in terms of the market that it's in, in terms of its management and its financial performance. Its market is what's called firewall software, which is basically network security. They have 62% of the market. Also, they have been able to grow their profits at a phenomenally high rate.

The stock is trading at a relatively low valuation, probably trading at a p-e of about 25, which on an absolute basis is not low, but considering 75% growth, is not too bad. It has gone up 70% in the last few weeks (since the low after the market reopening in September).

Q: Where do you think AOL Time Warner's stock (AOL) will be a in a year or two?

A: I actually think it will be pretty close to where it is right now. It might be up maybe 10% or 15%, but I don't really see it as being that fantastic a performer. I just have this feeling that there are tremendous costs associated with being in a lot of the businesses they're in. Anything related to Hollywood and talent means huge expenses, salaries, overhead, costly perks.

Obviously, AOL is not just in the talent business. They have over 30 million subscribers, and there has been success in cross-selling with Time, etc., and they do make money with advertising. But advertising is in a nasty slump right now. I do suppose it will come back, but I'm not sure when. I do feel that the hype associated with the company is hard to live up to.

Q: What do you think about the future of Intel (INTC)?

A: Intel is an interesting situation. Its fortune has been tied to Microsoft and Dell, and I guess the whole PC industry. Since Craig Barrett has taken over, the company hasn't done very well. Their competitor got a big portion of the market they should have gotten, but they're still the dominant player in the CPU market. I think that when demand picks up again (which could be 2003), they'll see significant revenue growth. But this is not a company whose stock will explode in the medium term.

Q: Why isn't Oracle (ORCL) doing better? It was downgraded today by Salomon Smith Barney.

A: Yeah, it was downgraded. Its revenue fell 1% in the three months ending Aug. 31. One of its problems is that it's Larry Ellison personified. Basically, one of the problems Larry Ellison has is that he drives talented people out of the company...[and] Oracle has such an adversarial relationship with its customers that there's actually a group called the Oracle Applications Users Group, which is basically a group that gets together to complain about the problems they have with Oracle products and use their combined power to get issues resolved.

The shares fell 7% today on the downgrade from SSB, and [from] fear of the competition. IBM is encroaching, and Oracle will probably end up losing customers to them.

Q: Peter, I guess the big question now is do you think the recent tech rally will continue? Do you think the market may be getting ahead of itself here?

A: Well, first of all, I guess I should say that this "wall of worry" thing may be why this market is going up right now. The fact that the market is so robust does not seem to make any intuitive sense. The market may be doing what people say it does -- forecasting six to eight months from now. Like they say, you should buy when things are bad.

I mention my index being up 88% because there are so many small numbers out there. Low values go up a dollar -- that's a huge percentage. People are buying these because they're looking out 6 to 12 months from now and thinking that these companies won't go out of business.

On the other hand, there will continue to be this X factor, where unfortunately we do not know if some terrorist act will come along and throw us for a loop more than what we've been anticipating. I guess I would conclude by saying that over the last few weeks, it has amazed [me] how the market has come back. The Dow started out dipping, but closed up 100 points -- a huge swing, even amid warnings about anthrax, etc. It's just a phenomenal situation.

Q: Peter, why don't you tell us a little bit about your book, e-Stocks? Is the advice in the book applicable for this market?

A: I think e-Stocks is particularly valuable now, because most people are not aware of the amazing increase in the stock prices in this area [Internet-related stocks] over the last month or so. In e-Stocks, I describe a method that you can use to find these companies that are great stocks -- companies whose underlying business and stock price are likely to do well.

In retrospect, people who bought stocks after the market for patriotic reasons -- whether it was luck or just good thinking on their part -- it turned out to be a superb time to jump in. That period of a couple of days was a superb time to take advantage of some very low valuations.

Q: Is there anything you want to add in closing?

A: I guess the one thing that I would definitely add is that despite my enthusiasm for this area, I think we all need to become very cautious about our finances right now and make sure that we have a substantial amount of our money in very secure investments like money markets or bank accounts. This is not a time to be betting our nest eggs on stocks.

I think we need to remind ourselves of the purpose of investing and make sure we plan for both good outcomes and not-so-good outcomes in the stock market. So even if things don't turn out like we hope, we'll still be in reasonably good shape. E-stocks should be a portion of people's portfolios but not the whole thing.

blog comments powered by Disqus