The Wall Street Journal-20080206-Ahead of the Tape
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Ahead of the Tape
Full Text (532 words)Wall Street
Wakes Up
To Home Glut
The stock market's bout of amnesia is over. Investors somehow forgot that the housing market was still in the dumps these past few weeks when they ignited a rally in home-building stocks that sent the Dow Jones Wilshire U.S. home-construction stock index up 47% in just four weeks.
Credit the tonic of lower interest rates, which in years past has been the signal to buy home builders. Home builders often rally before the housing market recovers.
Yesterday's wipeout sent home-builder stocks down 3.7%. That should take some of the air out of the sector.
Investors still interested in home builders should turn their eyes to the glut of homes on the market. Banc of America Securities analyst Daniel Oppenheim, who upgraded several builders to "buy," earlier this week, expects inventory to peak then shrink this year.
But in several markets, supply is growing. Last month, the supply of existing homes for sale grew 4% in Phoenix from December, 1% in Washington, D.C., and 2% in Riverside, Calif., according J.P. Morgan analyst Michael Rehaut. The National Association of Realtors says there were 3.9 million existing homes for sale in December, up 13.2% from a year earlier. That's nearly a 10-month supply of homes.
Toll Brothers Inc. reports preliminary results today. Its chief executive, Robert Toll, is probably happy about the rising share price. But what he says about the supply of homes is what will really matter.
Technology Bellwether
Not in Such Bad Shape?
Technology stocks were hot in the second half of 2007. Then a cold front named Cisco Systems Inc. swept in.
On Nov. 7, Cisco Chief Executive John Chambers said in a conference call that demand in its enterprise segment will be "lumpy." Rarely has one word destroyed so much in market value. The Nasdaq Composite Index has dropped 16% since then, including a 3% decline yesterday. Shares of Cisco have lost 29%.
Investors will be on edge in case the networking-gear maker sets off another time bomb today, when Cisco reports fiscal second-quarter results. Analysts surveyed by Thomson Financial expect the company to post earnings of 38 cents a share, up from 33 cents a year ago.
There's a good chance investors have overreacted, worried that sales to Wall Street banks would be hurt by the subprime turmoil. Domestic financial services only make up 4% of Cisco's revenue, according to Citigroup.
Every other segment at Cisco is growing at a solid clip. The company has fat gross margins and strong free cash flow. Its price-to-earnings ratio is 12.9, based on earnings expectations for the fiscal year ending in July 2009, lower than the S&P 500's forward P/E of 13.7 and about 20 for Google and Apple.
Video and telephone service delivered over the Internet is surging, boosting demand for Cisco's routers. The company has ample exposure to fast-growing overseas markets.
These elements usually make investors drool. It may take some time for the stock to recover, given the market's jitters and the potential for more caution from Mr. Chambers today. But over the long haul, the stock might not be in such bad shape.
-- Scott Patterson
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