Got Nortel?
Money
managers speak out about the battered stock
Just seven
days ago, the Toronto Stock Exchange’s resident eight hundred pound gorilla,
Nortel Networks, saw its share price pummeled after it announced a significant
reduction in projected growth over the next few years. An update on technology
stocks on both sides of the border is becoming a monthly habit in this space.
This week, I will share with you some comments from a few money managers
regarding their outlook and what they’re doing with Nortel.
In January,
Nortel had announced that its profits were right on target and that they
continued to expect thirty per cent growth in operating profit over the next
year, and thirty to thirty-five per cent over the next few years. Within a
month of that bullish announcement, they announced an anticipated quarterly
loss and a slash of projected growth, down to ten per cent next year and ten to
fifteen per cent over the next few years. While I found the quick and drastic
downward revision somewhat suspicious, most money managers did not.
Most money
managers with positions in Nortel say that the company’s woes are due to the
following key factors:
·
the US
economy is slowing much quicker than expected;
·
equipment
purchases by other companies is cautious; and
·
access
to expansion capital from financial institutions is shutting down (contributing
to the second factor).
Here are
what some of the managers running your mutual funds have to say.
CI’s Global
Technology Sector and Global Telecommunications Sector funds held about four or
five per cent in Nortel as of the end of January. In the short-term, he sees
stock remaining risky, with some pessimism being spread to other industry
players. However, he remains confident in the firm’s ability to grow at ten per
cent next year, and fifteen to twenty per cent over the next several years.
Overall, he rates it a hold.
Synergy has
built a name for its focused style plays. Most have lost faith in Nortel’s
ability to provide accurate guidance to the investment community, and this team
echoes that sentiment. There are three distinct teams, which provided opinions
on Nortel last week. Each team held between six and eight per cent of their
portfolios in Nortel leading up to the recent announcement.
Synergy’s
momentum team had perhaps been the company’s biggest Nortel fan, given its
strong revenue growth over the past few years. However, that all changed with
last week’s announcement. The downward revision of projected growth and the
fact that they were going to report a quarterly loss (i.e. a negative earnings
surprise) made it mandatory for momentum managers to pull the trigger. Those
are two of the essential qualities needed for a momentum manager to buy a
stock, in the absence of which the stock must be sold.
The firm’s
growth team sold most of their Nortel holdings immediately upon the
announcement because their short-term outlook is more uncertain. However, the
growth funds maintain some exposure because they still like its longer-term
prospects.
The value
team also cut their position substantially but maintains some exposure. Also
mentioned was the opinion that the reduced outlook is not yet reflected in
current prices. In my opinion, I don’t know what that stock was doing in a
“value” fund to begin with. No matter how loosely you define value, Nortel just
doesn’t fit.
As of the
end of January, three Canadian Maxxum funds held between four and ten per cent
of their assets in Nortel, while the Scudder Canadian Equity held about eight
percent. Jackie Pratt, who runs Maxxum’s Canadian equity portfolios, had lost
confidence in Nortel’s ability to accurately project their growth. In fact, she
sold a good part of her position last year while the stock was strong. The only
reason she kept any at all (and bear in mind that this is my interpretation of
her commentary) is that she didn’t want to take the risk of significantly
underperforming the key benchmarks if the stock regained its strength. As for
Scudder, they don’t really have an opinion because they run their Canadian
stock funds with a black box model. That basically means that stocks are
chosen, based on a back-tested computer model.
Janus is
the name of Scudder Maxxum Co.’s third line of funds and also of the management
team in charge of Maxxum’s US and global stock portfolios. They didn’t provide
any detailed opinion, except to confirm that all of their funds held from zero
to two per cent of assets in Nortel. Hence, Janus funds would not have been
adversely affected.
AIM’s
global managers see a lot of uncertainty in the short-term, given the US
economy’s potential to continue to slow and the impact on companies’ spending
patters. In the medium to long term, this team sees Nortel as an attractive
stock and, in their minds, the best among its peers.
As for the
Trimark side of this firm (namely Trimark’s Canadian equity team), I’m a bit
puzzled. This team wouldn’t touch Nortel for the longest time. Then, in a
conference call about a month ago, it was confirmed that Nortel was purchased
for Trimark’s Canadian equity funds. It was said that the stock was purchased
based on the expectation of more than twenty per cent in annual revenue growth
– significantly above the recent revision. Since no comment was made regarding
the Trimark Canadian equity funds, I speculate that they may have been taking
action on the stock over the past week. Exactly what that is I don’t know, but
my guess would be that they’re selling.
Given that
the economy holds a lot of uncertainty, and the NASDAQ index continues to trade
at a price equal to nearly a hundred times its composite profits, I remain
pessimistic about a quick rebound in this sector. Sure, technology will return
to its glory at some point, but when is anybody’s guess. This type of market
uncertainty just reinforces the fact that having broad exposure to different
asset classes, geographic regions, and industries will prevent any big bets on,
and over-exposure to, the trend of the day.
Dan Hallett, B.Comm.,
CFP is Senior Investment Analyst with Sterling Mutuals Inc. He can be reached
at dhallett@sterlingmutuals.com. Sterling Mutuals is registered as a mutual
fund dealer in Ontario, British Columbia, and Manitoba.