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Please respond to Sivy on Stocks SIVY ON STOCKS from money.com
April 20, 2001 Bigger is better Tech stocks are coming back, and giants that dominate important markets are likely to lead the advance. At the forefront of that group is Microsoft, as the company's latest earnings report shows. By Michael Sivy "It may be that the race is not always to the swift, nor the battle to the strong -- but that is the way to bet," said Damon Runyon, whose short stories about the hustlers of New York City's theater district served as the basis for the musical "Guys and Dolls." Runyon's street-smart observation is good advice for today's stock market. It may be that almost all computer and telecommunications stocks were hurt in the Tech Wreck of the past year. But not all of them will rebound equally as the economy improves. Some dot-coms are gone for good. And many small tech stocks have permanently lost market share. But the biggest tech companies, which dominate important industry sectors, are likely to lead a powerful advance. The next six months will be tough for technology companies, with excess inventories and infrastructure overcapacity afflicting industries such as semiconductors and telecom. But the longer term outlook argues powerfully for a rebound. Over most of the past century, stocks have gained substantially -- as much as 65 percent -- in the 18 months following four straight interest rate cuts by the Federal Reserve. And as soon as investors are convinced that the worst is past and that the outlook for the next few years will be increasingly positive, they'll begin moving money into the most solid tech choices. That's essentially what has been happening with Microsoft [MSFT]. The share price dropped to less than $41 in December. But since the Fed began cutting rates in January, the stock has climbed a whopping 70 percent to nearly $69 a share. And on Thursday, Microsoft's rebound was reinforced by a surprisingly good first-quarter report. It wasn't that earnings were so high -- they were only a couple of cents a share above expectations. But both analysts and investors were impressed by how well Microsoft's businesses are holding up. In the first quarter, Microsoft's revenues climbed 14 percent from year-earlier levels. Sales were particularly solid for upgrades of the Windows operating systems used by corporations and for server software. And though the company indicated that earnings growth for the next couple of quarters would be flattish, the revenue outlook remains quite positive. For next fiscal year, which begins in July, earnings are projected to improve by a bit less than 10 percent. That near-term growth alone can justify Microsoft's 35 P/E, based projected earnings for next year. But investors aren't looking at current profits. They want to know whether the franchise is strong -- and whether it's getting stronger. The answer to both questions is yes. And since Microsoft is a massive cash generator -- with $30 billion in liquid assets -- it shouldn't ever have to worry about financial problems. Microsoft provides such a broad range of software products that it can thrive even if sales of personal computers remain low. Further, the company's large established base of users means that upgrades can boost revenues even when sales of new software products are unimpressive. Most important of all, by the end of the year Microsoft will have upgraded most of its important products. That means that the world's software giant figures to be at the forefront of the next market advance once the current bear market is clearly over and the economy is in an upswing again. ### Post your comments on Michael's column at: http://www.money.com/depts/investing/sivy/index.html To subscribe or unsubscribe to Sivy on Stocks, go to: http://www.money.com/email/ ----------------------------------------------------------- MARKETPLACE ----------------------------------------------------------- CONTACT THE BIGGEST COMPANIES IN THE WORLD! Over 5,000 contact names in the OFFICIAL FORTUNE Databases. DOWNLOAD THEM NOW! http://www.fortune.com/datastore/?mn1 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Special Internet Offer!!! 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