PALO ALTO, Calif. (CNN/Money) -
Okay, you're looking for the second-half recovery story? Here it is: For the most part, business isn't getting any worse and companies are on track to hit earnings forecasts for the second quarter.
It adds up to a scenario whereby healthy companies in healthy industries will have positive returns for the second half of the year, just as they had in the first half.
I wrote the other day on the power of self-fulfilling prophecies. If investors and managers believe things are getting better, then perhaps they will.
Business spending will go up and maybe even hiring (though government figures sure are looking scary, with unemployment hitting 6.4 percent).
A typically bearish source of mine thinks the July earnings season, when second quarter results are released, will be one of the best we've seen in a long time, at least in technology.
The reason? Expectations have been dragged down so severely that companies can meet them without doing too much incremental business.
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And in some industries, stocks improve whenever prices improve. Period. My skeptic, for example, likes the shares of Micron Technology, the leading maker of memory chips, simply because chip prices are moving up. Micron loses money and most analysts are down on it. But its shares are a slave to pricing trends. Watch it go.
Risks abound, of course. The biggest one is investing in overvalued tech stocks that go down even if business doesn't. Why? Who knows with these things?
When I talk to short sellers and other professional investors who fancy themselves cynics, the tech stock that comes up more than any other is Netflix, a stock I pooh-poohed before its IPO.
Blockbuster and Wal-Mart never will allow Netflix (NFLX: Research, Estimates) to prosper, all the smart alecks say. Shows what we know.
The stock rocketed ahead 10 percent Wednesday to more than $27 on news of strong subscriber growth. It tacked on another 2 percent on Thursday, a down day overall.
The thinly followed company is now trading for nearly 100 times Wall Street's estimates for 2003 earnings.
Then again, its profits are growing at nearly 100 percent year over year. This is either going to be like the old America Online and eBay (defying the short-sellers who never understood that tremendous growth trumps valuation) or EToys, Webvan and a gazillion other hype stories, where competition or lousy business models eventually did in even well funded startups.
It's always puzzled me over the years when stocks trade up on the news that a company is cutting employees. I understand the rationale just fine: Slicing overhead costs translates into higher profits equals higher share prices.
But it always seemed to me a sign of fundamental unhealthiness when companies fired workers. It appeared to be as clear as sign as any that business wasn't so hot.
It therefore made sense Wednesday when Baxter International stock was one of the few losers for the day, down 2 percent after the health-care products company said it's cutting 2,500 workers, or 5 percent of its work force.
Of course, Baxter also reduced earnings estimates, which likely is the real reason the stock dipped. Still, at least Wall Street didn't obnoxiously cheer the job cuts, as it's wont to do.
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at email@example.com.
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