If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
09/02/2005 12:00 am EST
"We think the Fed will honor its tradition and go too far in raising rates, causing a downturn in 2006," cautions Michael Murphy. "As such, we’re looking for companies that will do well regardless of what happens in the economy." Here are some of his favorite tech and biotech plays.
"The economy is very strong this quarter. It’s going to be very strong in the December quarter. Corporate earnings are very strong. The bad news is that when you look back through history, during periods of strong economic growth, the stock market does poorly. The market does very well during periods of weak economic growth. That may seem totally counterintuitive, but the stock market anticipates, and in this case, the market is expecting continued increases in interest rates.
"As a result, we want to sell into this rally, which could peak as early as mid-September or as late as mid-November. We will then see a peak and then a significant downturn during 2006. We’ve had a good long run. But now, the economy is hitting that overdrive point, where interest rates go up, monetary supply gets squeezed, the Fed takes the punch bowl away, and the market starts down while all the numbers looks good. Given this outlook, in our search for stocks, we are looking at trends that are very specific. We are focusing on companies that we believe will continue to show revenue growth, even in a slowing US economy next year.
"Harmonic (HLIT NASDAQ) is a favorite plan on the convergence of voice, video, and data. In this area, voice is easy. Data is harder. But video is the tough part. And Harmonic is one of the dominant players in digital video. The big question here is when will the money flow from the cable companies and the telephone companies to deploy these video on demand and content on demand systems. I think the budgets are in place. The money is starting to get spent. I think it will be spend throughout 2006. It’s really a war between cable, telephone, and satellite companies. Harmonic is the 'arms merchant' in this war, selling to all three areas.
"Plug Power (PLUG NASDAQ) is a fuel cell company that I think is a big winner from the recent energy bill. I was only thinking they would get a 20% tax credit, and they got 30%. Plug Power does the backup systems. They don’t do the big stand-alone systems. They are putting in a big installation–70 offices–for the Florida Department of Emergency Services. When you think about Florida, when do they need emergency services the most? When a hurricane hits. When do they not have electric power? When a hurricane hits. They have to have a reliable back-up power system. This is a real showcase installation. On a commercial basis, with a 30% tax credit, an awful lot of companies–such as hospitals and offices–could really use this back-up power. (We note that he recommended this stock prior to Hurricane Katrina.)
"Meanwhile, the biotechnology sector is probably where computers were when I started in the business in the 1960s. It’s got a long, long way to go. At some point, the computer and semiconductor industries will stop being the driver of the economy, and they will hand the torch to biotech. Although that may still be many years from now. In the meantime, an awful lot of money is going to be made in the sector, because we are finally on the edge of some really significant breakthroughs. Setting aside the religious or moral issues, one of the most promising lines of work is in stem cells. And in this area, we would look at Geron (GERN NASDAQ).
"As a high risk, speculation in the biotech sector, Cell Therapeutics (CTIC NASDAQ) is a company that is currently asking the FDA asking if they could file for approval for a drug that replaces cancer agent, Taxol. It’s equally effective, but without the dreadful side effects. Phase III trials are done. The technology risk is over. It clearly works. But the company is low on cash and the market clearly does not think the FDA will give approval. If the FDA does approve the drug, the stock could jump very sharply."
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