What to do in the second half of the year
Interview: Lehman Brothers---Chip Dickson--Chief Equity Strategist
>> a legal setback for wal-mart. female employees who claim the company discriminated against them in aloting pay and promotions since 1998 have been% -granted the right to pursue their case as a group in a class-action. lawyers for the women say the decision by the federal judge in san francisco could create the largest civil rights class-action ever certified against a private employer. the suit could yield an award of more than $1 billion in back pay, and this is emphasizing the word “could” because wal-mart plans to appeal the ruling.% we turn to our special “markets at midyear” series. we are speaking with some of wall street’s top strategists to get a leg up on what to do in the second half of the year. brian sullivan asked chief equity strategist from lehman brothers, chip dickson, about options expensing and tech company earnings.
>> we expect something to pass. there seems to be more and more of a sentiment in washington to let fasb have its ways and if it does happen, there would be a ruling in the fourth quarter. and we’d start to see the effect effects. fourth quarter or first quarter. unfortunately, it’s the kind of thing that it won’t matter until it matters and the tech sector is the one affected the most.
>> it is a reason alone to stay away from buying chip and tech stocks?
>> no, i think you always have to look at what the valuation is and i also think that you cannot use the 2003 numbers as your benchmark for determining the expense. it’s our view that the expenses will be a lot less in 2005 when we see the numbers because companies will adjust. 2005 will be the period of maximum pain and then you’ll see earnings growth enhancement after that.
>> let’s say you own a tech company and they have to expense their options which they had not been doing before, the company says we’ll have to restate and cut down earnings for the next year or so, do you hold on to the stock because eventually it will become a positive or will that p.e. multiple come back down and you may not see the value for years?
>> you’ll have to look at it company by company. i don’t have the list in front of me right now. but there’s a wide range of the effects some companies will have and you have to make your assessment given the valuation, et cetera. some companies you won’t want to hold.
>>> let’s talk about the alpha game. tell us what this is, how to play it and where we can invest and when in the second half of the year, chip.
>> we looked back to 1966 at the s&p 500 and we broke the investment cycle into four stages and right now the market ‘s in the fourth stage which means we have a positive output gap. there’s a lot of slack resources in the economy. but the economy is operating above its theoretical potential. it’s a rising tide lifts all boats phase and the market ‘s less discriminating in terms of what it views as stocks or between the sectors. it’s more right to get the asset allocation call right and we think you want to be overweight equities right now. we think you go into stage one where you define what the leaders will be some time in 2005 so one of the things we’re trying to get our arms around is who will be the leaders of the economy coming out of this.
>> what is interesting in one of your notes is that the gap between some of the better performing groups and some of the worst performing groups is that some of the most narrow it’s been in years.% what does this mean?% does it mean that losses can be mitigated no matter where you go and do you expect this, then, chip, to widen and for the outperformers to outperform?
>> we think the premium on stock picking and industry and sector picking goes up in stage one. right now, again, the market ‘s less discriminating which is why things are narrower. but we’re going to get into a period where you have to be more selective.
>> you mentioned overweighting equities in the second half of the year as an overall strategy, what groups right now look attractive to you from an equity point of view, chip?
>> we like the industrials with a lot of earnings momentum there. we think they’ll continue to surprise on the upside. so the industrials is a sector we like. we also like parts of the materials sector, mining areas. we have paper and porous products areas. we’re underweight energy, utilities and, healthcare and consumer staples.
>> we’ve heard a lot about energy. what looks unattractive about energy right now?
>> it’s a valuation call as oil prizes will pull back before going up again.
>> a lot has been made about china with material stocks. there’s fears about a hard% landing in the chinese economy% slowing rapidly. we’ve seen slowing. do you believe china. will achieve a soft landing and% they’ll continue to buy materials and industrial equipment from u.s. companies?% -
>> our view is the odds of a hard landing in china have gone up. at least our economists feel they have, about 25%. but we think the stocks have reflected a very sic pullback already so we think there are good values there anyway.
>> when we return, we’ll hear from the c.e.o. of palmone, shares up 36% today. the c.e.o. will talk about the outlook and rising steals ofs of their new trio multiproduct phone.
>> a management change at coca-cola. daniel paloma is out as chief marketing officer, 13-year coke veteran chuck root is in.% he was recruited by steven heyer who submitted his own resignation on june 9 after the board passed him over and picked neville isnel for the top spot, instead. shares of palmone soared today after the company said profit and sales this quarter will be better than estimates. the stock up 37% at $29.36, excluding some costs. the maker of hand-held computers is expecting to earn as much as 17 cents a share versus expectations for a breakeven quarter from the analysts. driving palmone’s performance is the demand for its trio device.
>> our numbers show it’s continuing to take share and stabilize and provide a platform to grow smart tones from. and smart phones represent enormous growth for us over the next several years. we feel very good about our performance this quarter and optimistic about next year.
>> if you think that palmone shares are overly reliant, the company, on one product?
>> we never give guidance on the products until we announce them but we do an awful lot of work with our customers to understand what do they want, what else can the product do to simplify their lives and make it easy for them to connect to the information they want. stay tuned, we’ll have interesting things coming in all of our products.
