SPY:
(Standard & Poors Depositary Receipts) The best
way to directly play any decline in the U.S. market is through SPY. This is an AMEX traded
index fund that directly represents the S&P 500. The technicals on SPY
have been deteriorating since April 3rd. It has fallen below both its 21 and 55 day moving
averages. On Balance Volume has been falling strongly since 4/3. We look for the first
support in any major decline to be at January's lows of 91.
DIA:
(DJIA Diamonds) We continue to remain bearish on the
U.S. market. We view the large cap new nifty 50 as overvalued by any historical measure.
We feel that in any market downturn the decline in the Dow will outpace the decline in the
SP500. DIA is in effect an exchange traded index fund which will allow you to short the
Dow Jones Industrial Average. Now is the time to short DIA.
NASDAQ-100
Index Tracking Stock (QQQ)- QQQ is an index tracking
stock designed by AMEX/NASDAQ to track the performance of the NASDAQ 100 Index. The
NASDAQ 100 Trust holds a portfolio consisting of all of the stocks in the NASDAQ 100.
The NASDAQ-100 Index has soared 70% since bottoming last October, led largely
by the 5 largest cap stocks in the index: Microsoft, Intel, Dell, Cisco, and Worldcom.
We feel that the index is severely overextended and vulnerable to a sharp
correction at this point. The shares of both Intel and Dell have reversed to the
downside. Microsoft shares have soared on a combination of rumors of an anti-trust
suit settlement and stock-split-chasers driving the share price up. MSFT shares are
extremely overbought and vulnerable to a tumble. We feel that shorting QQQ is the
best way to play a correction in the NASDAQ-100. The shares may be used as a
pure=play short position, or as a hedge to protect long-side profits. QQQ may also
be used by investors as a hedge to protect profits in the shares of individual NASDAQ-100
components: an individual with a profitable long position in MSFT could protect against
some of the downside risk by shorting QQQ.
Internet
Search Engines: Do
you remember biotech in '91/'92, Boston Chicken's IPO, Netscape's IPO--we do. We
also know that these over priced, over hyped stocks haven't come anywhere near their highs
since then. We submit to you that the search engine companies are birds of the same
feather. Sure they have great growth rates, but they have even greater valuations. Do you
really want to buy a stock whose PEG ratio is 3 times it's growth rate, or that is trading
at 300 times next year's earnings? We know we don't. When the growth rate slows from 100%
a year to 40% the stocks will come crashing down. Let us also not forget the whirlwind
pace of technological change--today's hot tech idea is often tomorrow's company relegated
to the dustbin of history. We're looking to take the entire group of internet search
companies out and short them. Extreme overvaluations, vertically ascendant charts, and
excessive investor enthusiasm are our favorite shorting friends. (5/19/98)
We also like LYCOS (LCOS) as a short. Lycos in many respects has been left behind in the race to be
the premier search engine/internet portal. We see it falling farther and farther behind
Yahoo in name recognition and use. Trading at an astronomical 293 times next year's
earnings, with a PEG of 6, this stock has entered a downturn which we expect to continue.(5/22/98)
We are adding 3 new names to
our short picks in the overvalued internet search/content provider/portal sector. YAHOO (YHOO) has been enjoying phenomenal growth as it
seek to establish itself as the premier internet portal and directory. It has also enjoyed
phenomenal growth in valuation. YHOO is currently trading at 38 times book value,55
times sales, 196 times 1998 earnings estimates, and 91 times 1999 estimates. The stock has
a PEG ratio of 3, and a PEG based on next year's earnings of 1.6. We look for valuations
to come back down to earth soon as internet stock mania withers. Technically YHOO is
deteriorating. Money flow has been falling since early May. The 21 day moving average has
fallen below the 55 day moving average, and the stock has completed a failed double top.
Our first downside target is the 21 week M.A. at 94. We look for the stock to approach its
200 day moving average at 75 by fall. Our second pick, INFOSEEK (SEEK), enjoyed a
30% runup last week. We like Infoseek's technology, but we feel they will have an uphill
battle against larger rivals in the race to become one of the main internet portals. The
stock has fallen from its 52 week highs of 45, but is still trading at twice its February
levels. The stock has runup from 4 3/8 over the past year. We view this stock
as being extremely overvalued, trading at 107 times next year's earnings estimates, with a
PEG of 2.1. Technically, SEEK has entered a downtrend. The stock is showing
divergences in both money flow and OBV. We look for the stock to hit overhead resistance
at 32-33 and from there to begin a final wave 5 downward towards its 200 day moving average at 16 1/2. Our
third new pick, C/NET (CNWK) surged 11
1/2 points this week after NBC purchased a stake in the company. We view the mark up in
the shares as excessive. C/NET's new online service SNAP! entered the portal game late.
Even with NBC's backing, SNAP! will face an uphill struggle to gain market share against
more established rivals. We regard the deal as too little, too late. We expect the shares
to decline as deal related investor enthusiasm subsides. Trading at 17 times sales, and at
a prospective 1999 PE ratio of 66, this stock has limited upside potential and great
downside risk. Distribution has been taking place. We look for CNWK to return to its pre-deal level of 31, near its 200 day
moving average.(6/12/98)
INKTOMI (INKT): We are amazed--not by Inktomi's technology, but by the fact that 2
analysts recommended this overheated stock in an overbought industry this morning.
Recommending jumping on top of an expanding bloated bubble has never seemed the best
course of action to us. Perhaps someone should remind them that all bubbles eventually
pop. We are even more amazed by the investors who sent this stock up 25 1/2 points during
the day. But then again, maybe we shouldn't be amazed, investors have yet to learn from
the long line of past financial manias. INKT is a promising growth company, but its
current valuation bears no resemblance to the actual fundamentals. INKT has developed new
search engine technology that speeds the traffic of web based info by created a large
database of web addresses so that the information doesn't have to be retrieved from its
original location. INKT has signed up AOL, DEC, and Yahoo to license its technology. While
the technology is good, it was already priced into the stock when it first started trading
at 18 1/2 last month. With a market cap of $1.5 billion, Inktomi is trading at 115
times trailing sales. We have yet to see a profitable buying opportunity develop when
stocks are purchased at 115 times sales. However, we have seen many short sale profits
occur at these multiples. Therefore we will short this Tulip before it starts to wilt. (7/6/98) (7/6/98)
KO:(COCA
COLA) It may be a great
company, and we do drink several liters of their products a day, but great companies and
great trading ideas often don't mix--especially when they're trading at excessive
valuations--i.e. 47 times this year's earnings, 41 times next year's, with a PEG of 2.4
(based on next year's earnings). We have trouble finding justifications for KO's market
cap being greater than the combined market caps of South Korea, Malaysia, Thailand,
Indonesia, and the Philippines. We'll overlook their adding proceeds from the
sale of their bottling divisions to regular earnings and just call this stock overvalued.
Investors have flocked to own this name brand tulip during the market's rise, and during a
market fall they will flee just as fast--that's if Asia related problems don't show up in
KO's earnings to make them exit first. This looks a good bet to short.
MSFT:(Microsoft)
Sure it's the most dominant software maker in the
world, but we see clouds on the horizon. For starters, there is the little matter of an
antitrust lawsuit against MSFT, add to that slowing profit growth and you have a good case
for a shrinking PE ratio. Looking past the overblown hype surrounding Windows 98,
we fail to see enough new, must have features in this new release to spark enough sales to
avoid an earnings disappointment. This stock has already entered a downtrend and is
15% off its highs. Trading at 51x '98 and 43 times '99 earnings, with a PEg of 1.8(
based on 1999 estimates), we're drooling over this as a short sale.
WLA:(Warner-Lambert)
It's hot, it's a favorite of momentum cowboys, but one
day soon they'll find a new favorite to hitch onto on the momentum highway. The company
does have a strong product pipeline and hotselling new drugs, but all of the good news
(and then some) has already been priced into the stock. Merely meeting earnings estimates,
or a market downfall( we know, we've been told the market only goes up) could cause this
highflier to get crushed. Trading at a frightening 47x this year's and 37x next year's
e.p.s. estimates, with a PEG of 1.76(based on next year's estimates) we wouldn't do
anything with this stock but abandon ship--or short it.
DELL:(Dell
Computer) It seems like only yesterday that PC makers
traded at a discount to the market because of fears that their products would become
commodities. Now that those fears have come to pass these stocks trade at almost 2 times
the market. Go figure! We have heard TV's talking heads gush forth that Dell is immune to
the price competition and lower margins resulting from the emergence of the sub $1000 PC,
but we don't buy it. For the average desktop user's needs a $1000 PC is adequate.
With the commoditization of the PC industry we fail to see how Dell will be able to stay
immune to the pricing, and margin, pressure it's competitors are experiencing forever.
Selling a commodity product in a super competitive industry, and trading at 51x this
year's and 39.5 x next year's estimates, we don't see this superman of stocks being higher
than it is now at this time next year. With a chart that rises straight up, and an equally
sky high valuation, this is our favorite PC maker--to short. (5/19/98)
We
continue to remain short DELL. The recent earnings report led to a renewed flurry of
buying, pushing the already overpriced PC maker's shares to 45 times next year's earnings.
While we believe DELL can grow at 30% a year, one shouldn't lose sight of the fact that
this company produces a product that has become a commodity in an industry with rapidly
falling prices. We are also expecting a sharp slowdown in European growth rates later this
year to negatively impact the entire tech sector. We expect a wholesale downward
adjustment of tech earnings estimates to occur as 3rd quarter earnings reports begin to
trickle in. Technically, the outlook has turned decidedly negative for Dell . The shares
hit important Fibonacci resistance at 122 on Thursday and turned lower. A double top is
forming on the stock's chart. We will be buying puts if the shares confirm the double top
by breaking below 105. We will look for a break below trendline support at 97 to lead to a
quick decline to the support zone at 90. We believe fair value for the shares is in the
75-80 range and look for DELL to decline to this level by year end. (8/24/98)
AMZN:(Amazon.com)
While we believe AMZN is the premier online
bookseller, both in terms of selection and service, we find the stock's stratospheric
current price to be unjustified. Internet momentum junkies have pumped this one up to
unsustainable valuation levels. AMZN has enjoyed rapid growth and now ranks as the 3rd
largest U.S. bookseller but it is expected to be unprofitable both this year and next
year. Competition in its home online market is heating up from both Borders and a
rejuvenated Barnes & Noble site. We expect margin pressure to hurt results. We also
view AMZN's sole focus on online retailing as a negative for future growth--there will
always be many people who prefer to shop in a bookstore. With the intensified competition
and a lessening of internet fever, we expect this stock to get walloped. The stock has
recently entered a downtrend after a failed double top. This looks like a short to us. (5/22/98)
Amazon has more than tripled in
price over the past month. AMZN is now trading at 28 times trailing sales. The company's
market cap is now double that of its much larger competitor Barnes and Noble. We do
not believe that the company's prospects warrant a larger market cap than Barnes and
Nobel. Loss estimates have widened for this year and next as price cutting and increased
advertising expenditures eat into margins. The share price is being driven solely by
momentum players and a massive short squeeze. When the internet stock juggernaut ends (and
investors return to their senses) this company will be recognized for what it is-- a
bookseller, and will be accorded the multiple of a bookseller. We expect the rocket shot
up to end soon. Technical cracks have appeared during the past month's rally. A negative
divergence has appeared in money flow. RSI, stochastics, and CCI are all showing
divergences with price. ADX at 53 has flattened and turned down. We view a downturn in ADX
from the above 40 level as a clear warning signal that a trend is about to change. We
would sell now to take part in the swift decline that always follows financial manias. (7/6/98)
Amazon wowed a few
"analysts" this week when it reported a narrower than expected loss. We
were not among those impressed by the latest earnings report. The company's loss
grew to $-.84 from $-.24 a year ago. Margins decreased to 21.1% from 22.7% because
of increased marketing costs, increased discounting of products, and higher sales from the
lower margined music line. In normal (i.e. non-internet based) financial analysis, a
company with increasing losses and decreasing margins is generally not a great investment
opportunity. The company announced that margins would remain under pressure because
of increased spending on marketing and an expansion of its distribution facilities.
This expansion of its distribution facilities in order to build inventory moves the
company closer to its store based rivals which also must maintain large inventories. It
also takes away one of the main differentiating props which have been used to justify its
lofty stock price. In short the company is moving closer to resembling a bookseller rather
than the technology play it is often mistakenly identified as. The company's
shrinking margins could come under further pressure as competition heats up in the online
world. Onsale and Buy.Com have both announced plans to sell some items at cost.
The company itself is not worried about the decreasing gross margins and says they
are likely to fall as Amazon adds new products. In our view gross margins and
profits still do matter, even for an internet company. In a similar vein, rising
competition is not a positive. Amazon will remain in the red for the next few years.
Current estimates call for a loss of 93 cents a share this year, -$0.22 in 2000,
and -$0.07 in 2001. The rapid revenue growth that is often used to justify the high
valuation levels has been accompanied by an even steeper run up in share prices which
effectively discounts all revenue growth. Amazon now trades at a Price/Sales ratio
of 29.7 (versus 28 in July). By contrast its 2 chief rivals, Barnes & Nobel and
Borders trade at Price/Sales ratios of 0.90 and 0.61 respectively. While the shares
have dropped 40% from their January highs, they are still up for the year to date and have
risen 270% from October's lows. These shares remain overvalued and extremely
vulnerable to a severe downward rerating when the current mania subsides and investors
begin to value the company in line with other booksellers.(01/30/99)
AOL:
(America Online) We had to chuckle when AOL's CFO said
the stock was undervalued and should be trading at $140 a share. If this logic were
applied to the entire market (which it seems to have been lately), then every small
biotech stock should jump from 12 to 85 overnight since one of them did. Suffice it to
say, we find this stock very overvalued even after its recent correction. At 181 times
this year's and 97.7 times next year's with a PEG (based on next year's estimates) of 2.1,
this stock has no further upside. We see increasing competition as the search engine's
position themselves as internet portals. We also find AOL's use of proprietary software to
be outdated and a negative.This stock has entered a downtrend which will continue. The
stock has broken its 21 day moving average which had acted as support 4 times since
January. Money flow has turned negative and there has been heavy insider selling. Short
this "undervalued" stock and enjoy the ride down.
GERMANY:The German market is vulnerable to a significant
correction. The rally over the past year has discounted the benefits of EMU far into the
future. We expect the export driven German economy to be hurt by the recent
freefall in the Japanese yen. Continuing weakness in Asia, and a higher Yen/Mark exchange
rate will lead to earnings shortfalls among the big German exporters. We expect the DAX to
decline to 5000. Any increase in the decline of the Asian economies could result in a DAX
of 4500. Our two favorite German shorts are Deutsche Telekom and Daimler Benz.
DT
(Deutsche Telekom): DT
ran up from its January lows of 17 1/2 to a recent 28. We regard the stock as
significantly overvalued. DT is trading on a 1998 PE of 25.7, and at 24 times next
year's estimates. The company is trading at a short inspiring PEG of 2.2 based on 1999
estimates. We see several negative clouds on the horizon for DT. European telecom
deregulation will hurt the company as more nimble competitors swarm into the bureaucracy
ridden former monopoly's territory. An unfriendly German regulatory climate will
hurt the company's ability to raise rates. Technically Dt has entered a downtrend.
RSI diverged with the recent highs and is declining. ADX has turned down from 40.
Distribution is taking place in these shares as money flow has turned decidedly
negative. We expect DT to retest the 22 level it last visited in early April.
DCX
(Daimler Chrysler):
The recent enthusiasm over the merger of Chrysler and DAI was overdone. We expect
significant problems as the two companies try to assimilate their disparate cultures and
workforces. Cost savings from the merger will take longer to realize than currently
expected. We expect the declining Yen to have a significant effect on the
competitiveness of DAI versus Japanese manufacturers. DAI, at 23.9 times this
year's earnings and 18 time's next year's, is trading at a premium to the auto industry.
We expect the Chrysler Merger to hasten the disappearance of this premium. Technically,
Daimler's picture is as ugly as it gets. The stock has broken down from a head and
shoulders top. Money flow is negative, and distribution is taking place. MACD and
stochastics showed divergences on the recent high. The weekly ADX has turned down from
40. We expect the first downside resistance to be at 85, with a first target of 75.
It's time to trade this model in.
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Last modified: April 02, 2000
Published By Tulips and Bears
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