by Gordon Pape in the Internet Wealth Builder
TSE analysis reveals tech stocks remain vulnerable
Statistics can be deceiving, so they have to be treated with caution. But some numbers that came across my desk last week were highly revealing about what's going on in the Canadian stock market these days.
A report prepared by RBC Dominion Securities looks at the TSE in a way you don't read about in the business pages Old Economy stocks versus New Economy stocks. The analysis doesn't draw any conclusions, but they leap out as you read down the columns of figures.
The first thing that hit me was how dramatically the underlying structure of the TSE 300 has changed in the past year and a half. At the end of 1999, New Economy stocks represented 42.3% of the index weighting, an amazing increase from a 19.8% weighting a year earlier. It appeared that Canada was fast on the way to becoming a New Economy nation, at least in terms of market capitalization. Well, the collapse of the high-tech bubble has certainly changed that. As of the end of May, New Economy stocks accounted for only 23% of the TSE 300 weighting just barely ahead of where we were back at the end of 98. Canada is once again an Old Economy country.
Moreover, those Old Economy stocks are thriving. In 2000, the TSE 300 Total Return Index gained 7.4%. But the Old Economy component advanced a very strong 29.3%. In the first quarter of this year, the overall index fell 14.5%. But the Old Economy stocks only lost 1.5%. New Economy stocks surged in April but by May we were back in the same pattern Old Economy +5.1%; New Economy -4.4%.
Meanwhile, one-time superstar Nortel continues to slip in its TSE weighting. At one time the stock accounted for more than 30% of the index. At the end of May it was just 8.6%. But even at that level, it continues to drag down the Industrial Products sub-index, of which it is part. With Nortel, that sub-index declined 3.3% in May. Take Nortel out of the equation and we see a 2.7% gain. Clearly, there are profits to be made in that area. Just leave Nortel on the sidelines.
All that is very interesting but the statistic that really caught my eye was the brokerage firm's price/forecast earnings section. This represents the p/e ratios of stocks, based on their anticipated earnings in the 2001 fiscal year. The figure for New Economy stocks is 48.87 in other words, these stocks are trading on average at almost 49 times expected 2001 earnings. That is not only very expensive, but it shows how vulnerable these stocks still are in the event of more unfavourable profit warnings, such as the one delivered by Juniper Networks in the U.S. on Friday.
Old Economy stocks, by contrast, show a price/forecast earnings ratio of 14.05. That's slightly higher than the March/April figures but still very reasonable and lower than the comparable year-end numbers for the past four years.
So although Old Economy stocks have been doing very well recently, they are not overpriced by any means. That's where you should be concentrating your buying attention at this time. The New Economy may be the wave of the future but you're more likely to make profits and sleep better at night if you stick with the old geezers, at least for now.