Value opportunity in US huge: Bagnoli
The recent boom in technology stocks on the United States market has actually masked a weak market in other sectors, according to leading US value manager.
Wednesday, June 14th 2000, 12:00AM
In 1999 the S&P 500 returned 21 per cent, however the tech and telecom sector of the index was up 59 per cent while the index ex tech and telecom was up just 6.5 per cent.
The trend continued in the first quarter of this year with the S&P 500 up 2.3 per cent, the telecom and tech sectors up 10.2 per cent and the index less tech and telecom was down 2.2 per cent.
Sanford Berstein director of international product development Paul Bagnoli told a Tower Asset Management presentation in Wellington on Monday that the fundamentals of the tech sector don't stack up.
He says the current environment represents a significant opportunity for value managers such as his firm.
Bagnoli's contention is that earnings do not support the price growth in some sectors, and many shares are overpriced.
Research done by Sanford Berstein suggests that US companies have been unable to maintain high growth rates for consistently long periods of time.
Between 1951-1999 only 10 per cent of companies had been able to achieve a 20 per cent growth rate for a period of five years, that percentage falls to 3 per cent over a 10-year period, and no company had grown at that rate consistently for 15 years.
Bagnoli says there are three factors that lead to bubble bursts: excess capital funds bad ideas, failures shut down funding sources and artificially inflated growth fades contaminating good companies.
There are signs of all these things happening at the moment, such as the huge amount of capital which has been thrown at dot.com listings, even if the business has no product or business plan and the canning or postponing of some IPOs because of the market volatility.
Bagnoli says many of the dot.com offerings are "pure financial fantasy". Of the 324 listed companies in the Internet universe 90 per cent are unprofitable, and in total they made a loss of US$6.9 billion last year, however they have a market capitalisation of US$1,157 billion.
"Go figure," he says.
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