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Is It Worth Buying? Depends...

Stock Market News

May 2002

Is It Worth Buying? Depends...

Can you hear me now? Can you hear me now? You have likely heard this annoying little mantra in the Verizon Wireless commercial where the guy on the cell phone is walking around in odd places incessantly asking the question, “Can you hear me now?” Have you ever wondered who is on the other end of the phone? How is that person responding? “Yes, I can hear you, but I will have to hang up now as I have just been laid off

It used to be that businesses lost money because nobody bought the product or service being offered. Cars came along and rendered the buggy whip obsolete. Gas logs threaten the existence of chimney sweeps. Falling demand reduces supply over time. It is the natural order of things.

What is hard to comprehend, though, is how companies, such as those in the wireless telecom industry, can’t seem to make money. Have you noticed all of the people around you using wireless phones, checking e-mail on their PDA, or reading a message on their digital pager? All of these communication devices are now standard-issue equipment in the new urban tool-belt. Forget hammers and tape measures.

If you spend any time at all in airports, malls, traffic jams, or other places where large numbers of people gather, you can’t help but realize that everyone seems to be talking to someone! With all of this demand, why no profit for the industry? Remember the old Soviet Union? During the cold war, the U.S. engaged the enemy in an arms race that could easily have bankrupted one or both countries. Each country tried to be king of the hill by building a larger and larger network of missiles and other weapons. They kept building even though both already possessed a more-than-adequate supply to wipe out the other and large chunks of the rest of the world as well. The objective had nothing to do with the need for more weapons, but rather it was merely to drive the competition out of business. The wireless industry is locked in a similar and equally deadly game. They are spending too much, unnecessarily. Their networks are large enough to serve their customers; but that is not the goal. The goal is to crush the enemy.

Other industries have been doing the same thing in recent years. At some point, corporate America lost its way. Instead of focusing on making a profit and growing market share over time, corporations became determined to rule the world, overnight. This raised the stakes for investors.

WorldCom faces a downgrade in its debt ratings that will reduce its credit worthiness to “junk” status. Other wireless players face potential bankruptcy. The U.S. stock market pulled back sharply in April in response to problems in the telecom group. Concerns abound as to which companies will survive their own debt loads.

As investors, we should be looking for opportunities in the battered industries that have been “re-priced” due to these fears. Telecom and pharmaceutical stocks, by example, are looking washed out. It is hard to imagine that the outlook could get any worse or the sentiment any more negative. These and a handful of other industries are reaching a point where external shocks will have little effect.

What makes these industries attractive, and what sets them apart from other similarly beat-up groups, is the demand. To be sure, there is no lack of fallen angels to choose from, but many are not worth buying, even at recent low prices. Why? They represent a value trap. On the surface they may appear to be a good value because their price has dropped, but so has the demand for what they sell.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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