graphic
graphic  
graphic
Commentary > The Bottom Line
graphic
The growth mirage
Plus: Merrill Lynch prepares for a bear-market tech rally.
October 18, 2002: 4:42 PM EDT
By Adam Lashinsky, CNN/Money Contributing Columnist

Sign up for The Bottom Line e-mail newsletter

PALO ALTO, Calif. (CNN/Money) - You're going to be hearing an insidious expression a lot in coming months: "Easy compare." The term is designed to make your heart rise, to get you excited about inexpensive stocks that might be buying opportunities.

Check your enthusiasm before plunging into the stock.

The "easy compare" is one of those quaint inventions of sell-side analysts. It's meant to provide relative assurance that a company whose performance has been dismal is about to get a reprieve. Why? Because the results from a year ago were so bad. In other words, now the company is growing again, at least compared to last year. Because investors like growth, the easy comparison is seen as a good thing.

Your answer ought to be: So what?

Recently by Adam Lashinsky
graphic
3 don'ts for a rough market
The danger of West Coast thinking
Fool me once...

Take, for example, Sprint (FON: up $1.22 to $11.89, Research, Estimates). It reported the ultimate easy-compare quarter on Thursday. Subtracting out the gobbledygook of so-called one-time events, Sprint earned 44 cents per share in the third quarter, compared with the 37 cents Wall Street had expected and 34 cents a year ago. There's the easy compare. Sprint also raised its guidance for full-year to about a $1.33 from about $1.24. So far so good. The stock jumped 11 percent Friday.

The bar, however, is pretty low. Net earnings for 2001 were $1.22. But in 2000 Sprint earned $1.84. The point is that Sprint's hardly a grower. Part of the company's confidence in raising earnings projections comes from its cutting its projected 2002 capital budget again, this time by $100 million.

A good performance from an easy comparison might mark a bottom. But it's when companies are beating tough comparisons that they're clicking on all cylinders. Not before.

Too hated & too cheap

Steve Milunovich, the market intellectual at Merrill Lynch, has put together two lists of stocks he thinks might, maybe, possibly go up if there's a bear-market tech rally over the next three months.

He notes that November, December and January typically are the best months for tech stocks, so even though he doesn't see a tech bottom yet, tech stocks might do well anyway for a while.

He's looking for opportunities in two places. The first is among heavily shorted stocks, as measured by the number of days it would take to wipe out the investors who are betting a stock would fall if they were forced to cover their positions.

The thinking is that a rally would squeeze the shorts, making the stock rise more. Top of the list: Terra Networks (TRLY: up $0.06 to $4.41, Research, Estimates). When I first saw the ticker and the name, I honestly couldn't remember what Terra was. I thought maybe it was some Silicon Valley router maker I'd forgotten about. Not so. It's the former Spanish telephone company unit that bought Lycos (remember them?) a few years back.

Amazingly, Terra's still around, still losing money, still worth almost $3 billion -- and still heavily shorted. It'd take about 23 days, based on current average daily volume of 300,000 shares, to wash out the Terra shorts.

Milunovich's second hunting ground is among stocks with low price-to-earnings-growth ratios. In other words, a company with a low PEG ratio, has a multiple that assumes its growth will slow. Top of the list: EDS, the troubled info-tech consulting company, whose PEG is a rock-bottom 0.32.

The problem with buying heavily shorted stocks is that the short sellers are there for a reason. The problem with low PEGs is that the growth rate can -- and likely -- will slow further. But everyone's looking for ideas, right?


Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at lashinskysbottomline@yahoo.com.

Sign up to receive The Bottom Line by e-mail.  Top of page




  More on COMMENTARY
Yes Virginia, there is a Santa Claus rally
Thanks for nothing, Corporate America
It's not just the economy, stupid
  TODAY'S TOP STORIES
7 things to know before the bell
SoftBank and Toyota want driverless cars to change the world
Aston Martin falls 5% in its London IPO




graphic graphic

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.