COMMENTARY -- If you're contrarian buyer, you ought to be flinging money around like beads at Mardi Gras.
Merrill Lynch almost singlehandedly drove markets to despair today. Merrill's imperial thumb came down on IBM (NYSE: IBM), Hewlett-Packard (NYSE: HWP) and Cisco Systems (Nasdaq: CSCO), and they in turn dragged down the rest of the market. Those who were about to die didn't even get a chance to salute.
A recent survey of IT buyers led Merrill to conclude HP's latest Unix offerings aren't selling well. At the same time, although IBM seems to be in better shape in servers, Merrill analyst Thomas Kraemer believes Big Blue's sheer size and breadth makes it more difficult for the company to avoid the effects of an economic slowdown.
"We are concerned about the company's outlook for 1Q00 and, especially, the subsequent quarters," writes Kraemer, who downgraded IBM to "neutral" from a "near-term accumulate" rating. "At $93 billion in revenue, we fear that IBM is just too big to get out of the way."
Kraemer lowered HP to a "neutral" advisory. HP's ballyhooed Superdome server isn't taking off as the company had hoped, and HP's version of Unix is losing more share than any other Unix platform, Kraemer says.
"We believe that a concerted effort by HP to drive Linux, improve its channel relationships, and continued success with color could materially improve our outlook," he says. "But we'd like to see those things happen."
Meaning he doesn't see them happening yet.
Cisco was hit by downgrade based on macroeconomic concerns similar to those expressed by Kraemer for IBM. Analyst Michael Ching now rates Cisco an "accumulate" rather than a "buy" for the intermediate term.
Ching's bottom line: even Cisco can't avoid spending cutbacks and falling price. Yesterday's warning from Foundry Networks (Nasdaq: FDRY) apparently convinced Ching that the network equipment environment simply can't be dodged by anyone. "Guilt by association," was reason enough for Ching to nail Cisco.
Merrill's downgrades were fueled by its proprietary survey. Always nice to see analysts relying on their organization's own research, rather than waiting for information fed by the companies they cover.
Quality research is always appreciated, but timing also matters.
Negative sentiments about the economy in general and tech stocks in particular have been filtering through the market for months. Look at the six month performance of the trio mentioned today:
Hewlett-Packard has already fallen more than 70 percent. Cisco down more than 35 percent. IBM dropping more than 20 percent. All have suffered more than the S&P 500 as a whole.
Wall Street has been kicking HP since September. IBM never traded at the kind of multiple that other technology high-fliers enjoyed to begin with.
Cisco arguably remains expensive, trading at 36 times estimated 2002 earnings, compared to a comparable multiple of 15 for IBM. On the other hand, the main worry about Cisco is not that it will disappoint, but that it will only satisfy. Ching didn't cut his estimates; he believes Cisco will just have a harder time beating them. Or put another way, even skeptical analysts believe Cisco will continue posting healthy growth.
So it seems silly to pound these stocks further, given the way the hits already dished out by Wall Street over the last few months. Everyone knew things were bad and took CSCO, HWP and IBM down along with the rest of the market. Merrill added some color, but nothing in the way of new revelation.
Perhaps the Street remain gripped by its dismay over the Federal Reserve's lack of action, and Merrill simply provided an excuse for further venting. The scene isn't optimistic, unless you enjoy defying trends. 22GO>