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Is the worst over for telecom?
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January 10, 2002: 4:49 p.m. ET
The analyst who correctly called the top for stocks like Cisco and Nortel is now calling the bottom -- sort of.
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - Few equity analysts nailed the telecom-bust better than analyst Paul Sagawa of Sanford Bernstein. Back in 2000, long before the rest of Wall Street figured out that the telecom-equipment market would dry up, Sagawa was urging his clients to run -- not walk -- away from the sector. Of note, he dissed Cisco and Nortel Networks when those two high flyers were still investor darlings.
So it was with great interest when I heard the other day that Sagawa had "called" the bottom -- that is, that the market for equipment like routers that carry traffic over telecommunications networks is finally set to improve.
My source, an executive in the networking business, eagerly and cheerfully relayed that Sagawa had turned bullish and suggested I check out his recent report.
"We believe that more concrete evidence of this re-acceleration should become apparent by the end of (the first quarter,) yielding a considerable catalyst for future share price appreciation for most stocks in the sector," writes Sagawa.
I've known Sagawa for four years now, and he's usually steered me right. Further, Bernstein is one of the most respected research outfits on Wall Street because the firm does no investment banking, leaving it with fewer conflicts than the rest of the bunch.
Unfortunately, while clearly more upbeat than at any time in the past two years, Sagawa still is hedging his bets, beginning with the title of his report: "Telecom Equipment: Industry Conditions Improving in 2002 -- Is It Already In the Stocks?" In short, Sagawa believes business will pick up, but worries some of the stocks have already run up too far.
He thinks there is still "two to three months of continued downside risk," and that certain "sexy" stocks, notably Cisco, already are far too highly valued relative to their growth prospects. Once it becomes apparent that Cisco won't achieve 20 percent annual growth, argues Sagawa, Cisco's shares will fall again. (Once upon a time, Cisco promised 30 to 50 percent annual growth. How times change.)
Instead, Sagawa has some surprising picks: 3Com, Lucent and Nortel. He thinks each is severely undervalued relative to the cash he thinks it can produce in coming years. Sagawa believes 3Com is worth $10 per share (compared with Thursday's close of $6.30); that Lucent is worth $10 (now at $7.15); and that Nortel is worth $9 (it's at $8.08).
When a recovery is in its first, fitful stages the most trusted companies tend to get a disproportionate share of the glory. But it is in precisely an environment when not all boats are rising with the tide that investors should be hunting for value. Sagawa, the bear who went into hibernation at the right time, is offering up three valuable ideas.
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