FYI | May 10 2006
Only six years ago Merrill Lynch decided the future was in high tech and no longer in base industries, so the broker sacked its complete team of resources analysts. Guess who’s advertising these days for reinforcement of its resources specialist team?
A few weeks ago independent equity researcher and financial news publisher Aspect Huntley decided to pull the plug on its active coverage of SMS Management & Technology (SMX). The decision comes at a time that other experts believe technology will be one of the standout performing sectors over the coming few years.
To give credit to Aspect Huntley’s decision, UBS used to cover SMS as well, but the broker already abandoned the stock in 2005. Smith Barney Citigroup is still holding on but without any enthusiasm: SMS is rated Sell, High Risk and that’s almost as low as any stock can be rated at Citigroup (it would only be worse if the High Risk tag would change into Speculative).
Macquarie, however, is one of the experts who still hasn’t given up on local technology and the broker has come forward a few times over the past few years making the big call that technology might well become a place to be again. Some of these calls turned out to be a bit premature, nevertheless.
Macquarie presently rates SMS Outperform, and is happy to do so even though the share price is well above its price target of $2.45.
Macquarie may well be wrong again, but history shows us we better not take too much guidance from increased or decreased attention at the leading brokerages. They have been proven more wrong then right over time, as shown by the now famous Merrill Lynch decision.
Investors should never forget that sell side analysts (the wholesalers are considered the buy side) are, above everything, pawns within commercial operations, and the businesses they work for follow the money beyond anything else.
Maybe management at Aspect Huntley and UBS does realise it’s probably not the wisest decision to make in scaling back on technology coverage, but hey, all the clients want to know right now is whether they should buy more of BHP Billiton (BHP) or wait for the next share price pull back and at the end of the day these people pay the bills for everyone.
Just as a side remark: The Merrill Lynch blooper shows us how little the world was aware of what was yet ahead of it only six years ago.
Back to technology: Oakton (OKN) stands out, not only within the sector, but in the share market in general, as everyone who’s covering the stock, and that includes Aspect Huntley, thinks it’s a Buy. Make that nearly everyone: Aspect Huntley rates Oakton a Hold.
So is technology the next big thing?
It is highly unlikely we will ever experience the craziness of the late nineties again during our lifetimes, but certain segments of what we denominate as ‘tech’ look set for at least a few years of strong growth.
Most of it, however, is likely to stay out of reach for people who prefer to invest close at home. Australians are known for their quick adaptation to new high tech devices, but its share market doesn’t contain too many choices when it comes to tomorrow’s technology.
And those companies that are active in the tech fields are mostly under-researched.
What conclusions should we draw then from news reports that Citigroup is looking to double its commodities research staff?
Is this not the ultimate proof the broker believes the current bull cycle has many more years to go?
It’s probably better not to read too much in these things, other than that Citigroup is simply following the money.
No doubt Citigroup clients worldwide are asking questions every day about how long the China impact will last and whether gold is on its way to a new all time high.
It doesn’t take a genius to figure out there is money to be made.
After all, my good friend Marcus Mueller from Reynolds Stockbrokers already predicted this would happen two years ago: the big brokerages would start hiring on masse so they would be able to sell the China and commodities story – in a big way.
It’s the mother of all super cycles, remember?
Till next week,
Your "this week I will honour my mother in Europe" Editor,
Rudi Filapek-Vandyck
(supported by the Magnificent Three: Chris, Rob and Greg)