A very bearish article,looks like the bulls are tucking their tail in and hiding.
QCOM IS THE NEXT TO FALL
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by Stephen Hu
After many years in stock market, I believe diligent analysis and
fewer transactions will help the overall performance. Day trading is
almost a sure way to lose money because the transaction fees and
bid/ask spread will add up to a significant amount to trader's
disadvantage. The strong convictions only come very few times a year,
and that's the time to execute. This time I think Qualcomm (QCOM) is
going down and recommend a sell.
Warren Buffet once said that when the shoeshine guys were talking
about buying stocks, that's the time he would sell. While, I saw a
shoeshine guy used a cell phone two months ago. That made me to do
some homework on wireless industry. I found some alarming data and
come to a conclusion: Wireless industry is grossly overcapacity and
in serious trouble.
Nextel has $15.6 billion in long-term debt and pay more than $1
billion a year in interest payments. Sprint PCS faces a monstrous
$15.4 billion in long-term debt, $4.5 billion in short-term debt and
$5.2 billion other liabilities, according to Securities and Exchange
Commission filings. To make things worse, wireless subscriber growth
is slowing down dramatically according to industry data, as evidenced
by that shoeshine guy already has a cell phone.
If the dot com bubble was bad, the telecom bubble is even worse. Why?
The dot com stock price goes up and down on paper, market cap come
from nowhere (maybe the hype?) and evaporate. But their debt size is
relatively small. Amazon has about $2 billion; Yahoo does not have
debt at all. So there is not much suffering to the creditors. Telecom
is a huge established industry and was able to borrow huge money when
the expectation was unrealistically high. They have been operating on
continuous borrowing to meet the cash flow requirements. Some
estimate that the total debt is over $100 billion. With 5-6 national
providers competing fiercely over market share by lowering prices,
nobody is making money. In fact most are losing big money on wireless
business quarter after quarter. Just think about over $100B was
invested in this money losing business with no profit in sight; the
chain effect could be devastating. Qwest was forced to fully tap a $4
billion backup credit line after it failed to find buyers for new
short-term debt. Sprint said today that it has no plans to draw on
bank credit, but I doubt they will have other choices. Most lenders
are concerned with the problems wireless providers are facing. With
lawsuits filed against major financial firms lending money to Enron,
everyone is on high alert. That's why Sprint PCS dropped to $8.75
today from around $24 in early January; Nextel dropped to $3.55 from
$11.67 with pretty much no bounce.
You may say the damage is already done and why am I saying this here?
While, I don't think it is over. If you were one of our clients who
followed our advice, as I did in my model portfolio shorted PCS at
15, I am still holding the PCS short and recommend clients to do the
same. I will give out the recommendation when I plan to cover it. I
expect more bad news coming about the debt issue. PCS will likely to
go much lower until someone like to pick it up. But who would like to
carry that debt load? Plus newer equipment to build networks is
cheaper and more efficient. I do see bankruptcy reorganization is a
serious possibility. One thing worth noting is PCS has over 150
millions shares sold short, which makes shorting it risky.
So what's the new idea? I am recommending sell QCOM. I put my money
where my mouth is, shorting QCOM in my model account. The bounce
backs will provide good entry points, preferably near $40. There are
23 brokerage firms covering QCOM at CBSMarketWatch.com: 10 strong
buys, 11 buys and 2 holds. I am betting they are wrong. You heard it
here on 2/19/2002.
The economy is a complicated ecosystem and all companies are living
in the food chain (supply chain). Qualcomm makes money when wireless
providers sell cell phone sets, or add/upgrade network equipment.
When the cell phone subscriber growth slowdown, vendors will cut back
on spending dramatically, they will feel the pain 1-2 quarters before
their suppliers. Same thing happened in the dot com age, the dot com
companies feel the pain first, and their suppliers like FFIV feel the
pain later. FFIV made real earnings about $1.3/share while it was
trading in mid 30s in late 2000. Many argued the business was solid
thus no worry. While, FFIV traded under $4 couple months later. I
think the same thing will happen to QCOM. With 70% drop of NXTL and
64% drop of PCS in 6 weeks, it is a little late to start short
position, but QCOM did not drop that much yet, which provides
opportunity to initiate a short position. Many people have high hope
on 3G data networks. I think the ramp up will take much longer than
most people anticipated. How many people would use a cell phone
device to surf Internet while on train or driving?
Technical indicators also showed QCOM is trending lower. The Center
for Financial Research and Analysis Inc. announced on Feb. 8 that
they found accounting issues in QCOM's report. The stock broke the
yearly low of $38.30 on that day. But it was later realized that the
issues were fairly small, and many brokerage firms recommended a buy.
The rally was short-lived and today it closed at $37.40. It is now
safe to say QCOM truly broke the yearly low, which is a very negative
sign.
The overall market, especially the large caps represented by DJIA and
S&P500 index are coming into a very dangerous zone. If you look at
the charts, you will find they bounced back after 9/11 technical
bottom, but just couldn't break the pre-attack downtrend line. The
indices formed a very smooth round peak and now trending lower. If
there is no significant good news, which I don't expect, the market
is poised to have an accelerated drop within the next couple weeks.
If there is any catastrophic event, this could be the crash my model
has been waiting for a long time. If it happens, this will be the
buying opportunity once in 5-10 years. I recommend reducing long
positions significantly, possibly selling all stocks to wait for the
buying opportunity, or have 20-30% long and 30-50% short. Simply put,
the risk is too high and the possible reward is too low for a heavily
long portfolio at today's market. I usually don't sell short except
when I feel the market will very likely to go down.
I am feeling much better than 2-3 years ago because the market is
very rational now. When we were on top of the big bubble all the
serious analysis simply didn't work. I am happy to see my model
portfolio (a real brokerage account) went from $68K in last July to
$145K as today's close. I am currently holding short positions on
PCS, QCOM, EMLX, VRTS and small long position on EONC.
DISCLAIMER: RECOMMENDATIONS AND ADVICE GIVEN HEREIN ARE MADE WITH THE
EXPRESS UNDERSTANDING THAT READER ASSUMES ALL RISK OF LOSS. I GIVE NO
GUARANTEE, EXPRESS OR IMPLIED. PAST PERFORMANCE DOES NOT GUARANTEE
FUTURE RESULTS. ALL INVESTMENTS CARRY RISK.
AI
