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SIVY ON STOCKS from money.com
November 22, 2000

Phone glut

Lucent continues to suffer. Will the stock recover anytime soon? And will
overcapacity problems in the industry spread to other telecom stocks?

By Michael Sivy

Lucent [LU] is the Florida of the telecom sector. It's big, it's booming
and it can't stop bungling. Lucent's latest foul-up was announced Tuesday:
The company said it would have to revise down the results reported for the
September quarter because of errors in the way sales were recorded. Even
worse, management said it won't be able to provide analysts with reliable
earnings guidance for the current quarter.

The real problem isn't the money -- third-quarter earnings will be hit by
just about 2 cents a share -- it's the principle of the thing. Investors
always turn skeptical when a company overstates its prospects only to lower
its sights later on. And Lucent has been pulling the rug out from under
analysts all year. Investors get even more nervous when a company mentions
accounting mistakes, no matter how small or innocent they seem. So Lucent's
most recent announcement sent the stock as low as $16.50, down more than 75
percent from the start of the year, before recovering to $17.75.

Lucent's latest troubles raise several questions for investors: What are
the company's problems? What are the implications for the entire telecom
sector? And what do Lucent's recurrent selloffs mean for value-oriented
investors in today's market? The last question is easiest to answer. We're
in the middle of a downtrend for technology stocks. Companies that
disappoint investors will receive little mercy. And it's very easy to get
burned by a stock that appears to have bottomed. I feel that particularly
keenly, since I recommended Lucent in July as a value play at $44 a share,
after it was already down nearly 50 percent from its all-time high (see
"The shining").
[ http://www.money.com/depts/investing/sivy/archive/000731.html ]

As for Lucent's problems, two are unique to the company itself, and both
result from its spinoff from AT&T in 1996. For more than a century, Lucent
had been able to rely on the Bell System as a captive customer, and so the
newly independent company failed to keep up with competitors in key areas
like optical technology. Second, Lucent is still reshuffling top management
to find a team that can get both the product line and the accounting system
in good running order.

The broader question is what Lucent's troubles indicate about the telecom
sector. Basically, the entire sector is suffering from various forms of
overcapacity. All the telecom companies geared up in one way or another for
much more business than has actually materialized. The result -- when
supply outruns demand -- is cutbacks in purchases of capital equipment and
falling prices.

Those short-term problems can be painful, but excess capacity always gets
used up -- and often far faster than analysts expect. So I imagine that
within a year or two, all telecom companies will face a firmer pricing
environment and their share prices will rally.

I believe that investors who want to build a long-term position in
technology need to own telecom stocks. It's impossible to know when any
particular stock will bottom -- in the short run, any telecom-related stock
could go lower, and not even the most successful, such as Cisco [CSCO] and
Nortel Networks [NT], are completely safe. But stocks like AT&T [T] and
WorldCom [WCOM], as well as Lucent, all are trading at least a third below
their asset value. You have to buy when stocks look undervalued and then
hang on without flinching if they go lower. The long-term profit potential
is there. And the best protection is diversification and patience.

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###

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