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Got Nortel?
Money managers speak out about the battered stock

Just seven days ago, the Toronto Stock Exchange's resident eight hundred pound gorilla, Nortel Networks, saw its share price pummeled after it announced a significant reduction in projected growth over the next few years. An update on technology stocks on both sides of the border is becoming a monthly habit in this space. This week, I will share with you some comments from a few money managers regarding their outlook and what they're doing with Nortel.

Cause of Nortel's woes

In January, Nortel had announced that its profits were right on target and that they continued to expect thirty per cent growth in operating profit over the next year, and thirty to thirty-five per cent over the next few years. Within a month of that bullish announcement, they announced an anticipated quarterly loss and a slash of projected growth, down to ten per cent next year and ten to fifteen per cent over the next few years. While I found the quick and drastic downward revision somewhat suspicious, most money managers did not.

Most money managers with positions in Nortel say that the company's woes are due to the following key factors:

  • the US economy is slowing much quicker than expected;
  • equipment purchases by other companies is cautious; and
  • access to expansion capital from financial institutions is shutting down (contributing to the second factor).

    Here are what some of the managers running your mutual funds have to say.

    CI's Steven Waite

    CI's Global Technology Sector and Global Telecommunications Sector funds held about four or five per cent in Nortel as of the end of January. In the short-term, he sees stock remaining risky, with some pessimism being spread to other industry players. However, he remains confident in the firm's ability to grow at ten per cent next year, and fifteen to twenty per cent over the next several years. Overall, he rates it a hold.

    Synergy

    Synergy has built a name for its focused style plays. Most have lost faith in Nortel's ability to provide accurate guidance to the investment community, and this team echoes that sentiment. There are three distinct teams, which provided opinions on Nortel last week. Each team held between six and eight per cent of their portfolios in Nortel leading up to the recent announcement.

    Synergy's momentum team had perhaps been the company's biggest Nortel fan, given its strong revenue growth over the past few years. However, that all changed with last week's announcement. The downward revision of projected growth and the fact that they were going to report a quarterly loss (i.e. a negative earnings surprise) made it mandatory for momentum managers to pull the trigger. Those are two of the essential qualities needed for a momentum manager to buy a stock, in the absence of which the stock must be sold.

    The firm's growth team sold most of their Nortel holdings immediately upon the announcement because their short-term outlook is more uncertain. However, the growth funds maintain some exposure because they still like its longer-term prospects.

    The value team also cut their position substantially but maintains some exposure. Also mentioned was the opinion that the reduced outlook is not yet reflected in current prices. In my opinion, I don't know what that stock was doing in a "value" fund to begin with. No matter how loosely you define value, Nortel just doesn't fit.

    Scudder Maxxum Co.

    As of the end of January, three Canadian Maxxum funds held between four and ten per cent of their assets in Nortel, while the Scudder Canadian Equity held about eight percent. Jackie Pratt, who runs Maxxum's Canadian equity portfolios, had lost confidence in Nortel's ability to accurately project their growth. In fact, she sold a good part of her position last year while the stock was strong. The only reason she kept any at all (and bear in mind that this is my interpretation of her commentary) is that she didn't want to take the risk of significantly underperforming the key benchmarks if the stock regained its strength. As for Scudder, they don't really have an opinion because they run their Canadian stock funds with a black box model. That basically means that stocks are chosen, based on a back-tested computer model.

    Janus is the name of Scudder Maxxum Co.'s third line of funds and also of the management team in charge of Maxxum's US and global stock portfolios. They didn't provide any detailed opinion, except to confirm that all of their funds held from zero to two per cent of assets in Nortel. Hence, Janus funds would not have been adversely affected.

    AIM/Trimark

    AIM's global managers see a lot of uncertainty in the short-term, given the US economy's potential to continue to slow and the impact on companies' spending patters. In the medium to long term, this team sees Nortel as an attractive stock and, in their minds, the best among its peers.

    As for the Trimark side of this firm (namely Trimark's Canadian equity team), I'm a bit puzzled. This team wouldn't touch Nortel for the longest time. Then, in a conference call about a month ago, it was confirmed that Nortel was purchased for Trimark's Canadian equity funds. It was said that the stock was purchased based on the expectation of more than twenty per cent in annual revenue growth - significantly above the recent revision. Since no comment was made regarding the Trimark Canadian equity funds, I speculate that they may have been taking action on the stock over the past week. Exactly what that is I don't know, but my guess would be that they're selling.

    Given that the economy holds a lot of uncertainty, and the NASDAQ index continues to trade at a price equal to nearly a hundred times its composite profits, I remain pessimistic about a quick rebound in this sector. Sure, technology will return to its glory at some point, but when is anybody's guess. This type of market uncertainty just reinforces the fact that having broad exposure to different asset classes, geographic regions, and industries will prevent any big bets on, and over-exposure to, the trend of the day.

    Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at dha@danhallett.com
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