'As hot as Paris Hilton!" one analyst gushed on news of Nortel Networks Corp.'s fourth-quarter numbers.
"Q4--Nice," another purred.
Look out, the hype is back, as analysts, media pundits and investors jump on the new Nortel bandwagon of 2004.
After three ugly years, the telecommunications giant that epitomized the froth of the late nineties-2000 bubble is once more Canada's most valuable company. Its stock surged 18.5 per cent yesterday to close at $10.38.
That doesn't compare with the $124.50 of mid-2000, but it's a whole lot better than 67 cents of October, 2002, Nortel's low during the bust years.
Many analysts were stretching for superlatives this week as they swarmed over the company's better-than-expected fourth quarter, and urged investors to "buy" or "overweight" portfolios with Nortel shares.
"It's clear that the analysts want the magic back," said Ross Healy, a veteran Bay Street stock watcher who is chairman and chief executive officer of the independent firm Strategic Analysis Corp.
Mr. Healy, who admires Nortel chief executive officer Frank Dunn's work in bringing the telecom firm back from the brink, said he was still bowled over by the euphoric comments of analysts at a conference call on Thursday conducted by Mr. Dunn.
"I saw shades of 1999-2000 all over again. There was that willingness to suspend disbelief and to believe that anything can happen."
Wasn't this madness supposed to be cured?
Investors surely learned from the all-too-recent ordeal of plunging stock prices and corporate scandals, when some Wall Street analysts admitted they shilled for public companies whose underwriting business their firms coveted.
Indeed, one Toronto inventory manager, who bought Nortel at $75 and still holds her badly devalued shares, said the painful experience changed her whole attitude toward investing. "It soured me -- I'm a lot more conservative now."
But memories fade quickly and, yesterday, there was Nortel again on front pages of newspapers and in the buzz around office water coolers and factory lunchrooms. The talk was about how far the stock would go or, as one Toronto office worker said, "I wish I had bought it at 67 cents."
The euphoria isn't confined to Brampton, Ont.-based Nortel. A new-stock-issue momentum is building in the wake of a $945-million stock offering by tech darling Research In Motion Ltd. of Waterloo, Ont. ATI Technologies Inc. said yesterday that it would go to the markets for $500-million.
Can media and entertainment stocks be far behind? Craig Media Inc., a cash-hungry private broadcast company, is looking for someone to buy it for $400-million. It may not get all of it but the selling price will be a leading indicator.
After four years of retrenchment following the $3.2-billion takeover of the Southam newspapers, CanWest Global Communications Corp. CEO Leonard Asper said this week that his company is now "conceptually interested in anything that moves."
But nothing gets an analyst excited like a telecom play. Deutsche Bank Securities Inc. analyst George Notter wrote in a research report yesterday that: "Few in Hollywood are hotter than Paris Hilton right now . . . and few in telecom equipment are hotter than Nortel."
The San Francisco-based analyst said in an interview he could understand a degree of skepticism about his exuberance, especially in Canada where Nortel is still a dirty word in many homes. "We've been there before, right?" he said.
But that was then and this is different, he insisted, with Nortel showing strong "earnings power" and with the stock trading at only 27 times 2005 earnings. Contrast that to crazy, overheated 1999 when it traded at 10 to 15 times revenue, let alone profit.
Mr. Notter, who started covering the firm in August, 2001, argues that the Nortel of 1999 was actually a poorly managed company that was "fat and inefficient." The new Nortel, he said, is slimmer and better run with the potential to boost operating margins further.
For analysts who have been more restrained, Nortel's surge has caused some sober reflection. In a widely quoted report, TD Newcrest analyst Mark Lucey admitted recently that valuation of stocks is now of secondary consideration for the markets. "Investors are betting on relative winners and losers. Stocks that receive the most votes will appreciate the most."
Certainly, Nortel's management deserves praise for reviving the company. But there is the danger that, as in 1999-2000, the adulation can get out of hand. Analyst conference calls will begin to sound like love-fests, instead of intense fact-finding exercises.
"Congratulations on the results," one stock watcher enthused to Mr. Dunn this week. A U.S. analyst said: "Frank, really good numbers and I have to say I missed your story, so, I give you credit, great execution numbers, look really good."
How will we know the bubble is truly back? Analysts will trot out the old 1990s jargon, words like granularity, texture and, of course, EBITDA -- or earnings before interest, taxes, depreciation and amortization. When EBITDA is king, instead of the old-fashioned bottom line, investors should be wary.
Business magazines will run more adulatory profiles of the CEO-of-the-moment, extolling his or her infallible strategic moves. New versions of Jack Welch, Dennis Kozlowski or Kenneth Lay will start to make their names.
Nina Munk, author of Fools Rush In, a new book that documents the messy AOL-Time Warner merger of 2000, argues that the massive media-Internet deal truly captured the speculative mania of the late nineties, when the cult of the CEO allowed bosses to wheel and deal without restraint.
But everything is cyclical, she said, and that era will surely come again. "There is a terrible sadness about how quickly we forget."
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
