In Focus

Investors Go Berserk Over Nortel Networks

In light of the recent craziness on Wall Street, we felt it was necessary to give you an example of a current company under fire. Sometimes reading between the lines (and utilizing areas of the Chicks Dozen) can eliminate the excessive sweating and heart palpitations that happen when you watch your stock go down the tubes. It's important to remember that what goes up must come down. The sun. The moon. The price of gasoline (or so we hope). And, sorry folks, but.Nortel Networks.

Last week the entire world watched on pins and needles as the beloved Canadian hero (no, I'm not talking about "Rocket" Richard) plummeted on the TSE300 and NYSE alike. On October 24 Nortel was down 28.5%, and since Nortel is a hefty and disproportionate 24.8% of the TSE300 index, you can imagine the Canadians were ready to drop the gloves.

Let's try to figure out if all that panicking is warranted, shall we?

Nortel Networks (NT: NYSE), a telecommunications giant, reported their third quarter net operating earnings were up some 64 percent compared to a year ago. Contrary to what one might think, they actually BEAT analyst's forecasts. Who cares if it was only 18 cents/share compared to the predicted 17 cents/share! At a time of astronomical market volatility, an increase in earnings is a positive thing. Still, it is only one-half of the equation.

On the other half of the equation, it was reported that Nortel took a net loss of $586 million for the quarter vs. a $79 million loss for the same period last year. BUT, if you read the fine print you'll see this figure includes acquisition costs. What does that mean? Being a woman who thinks like a Chick, I decided to find out. A quick click on their web page www.nt.com and in crystal clear business jargon (isn't that some kind of oxymoron?) I found the following:

Net earnings from operations applicable to common shares is defined as reported net earnings applicable to common shares before "Acquisition Related Costs" (in-process research and development expense, the amortization of acquired technology and goodwill from the August 1998 acquisition of Bay Networks, Inc. ("Bay Networks") and all subsequent acquisitions), stock option compensation from acquisition/divestitures, and one-time gains and charges.

Did you get that? It just means that they are still paying the cost of that particular acquisition, and that it had been spread out over a period of years. It also included other acquisitions and Research & Development expenses. Acquisitions are huge dollars; you simply have to expect to make these purchases sometimes to move your company to a higher level. And understanding why things happen, rather than just taking them at face value, can keep you from selling yourself short. Literally.

So, on the heels of the day that Nortel took a nosedive, the company's press release explained their drop in sales was related to their shortage of workers. How would you like to have that kind of problem? So darn popular you can't staff enough people to keep up with the demand. That's similar to the person professing their inability to gain weight no matter how much they eat. The kind of "problem" most of us would love to have. In other words, their business isn't suffering per se, rather their manpower difficulties are slowing their sales. That's a bit easier to deal with, wouldn't you say? Okay, let's keep digging.

Another area the Chicks like to delve into when feeling out the stability of a company is the people behind it. If we can feel good about who's at the helm, we'll feel that they have the company's best interest at heart. John D. Roth, CEO of Nortel, has been with the company since 1969 and has held various positions within, from division general manager to President and CEO. He knows every nook and cranny of this operation. So when he takes what others might consider to be big risks, he stands by his decisions and sees them through, usually with great success.

Case in Point. In 1998 he decided to purchase Bay Networks (you know, the one they're "paying" for now) a data-networking group trying to keep up with the Cisco's of the world. Many investors didn't like that idea, and they let Nortel know it. This "risky" move has put Nortel in a position to be a very credible challenger and possibly the first to develop the newest phase of wireless Internet.

Now get this. The day AFTER the sky fell, Nortel informed the world that they'd just signed another lucrative deal. "Xfera has selected Nortel Networks [NYSE/TSE: NT] as primary supplier to supply Wireless Internet infrastructure and services for its third generation (3G), UMTS (Universal Mobile Telecommunications System) network in Spain. The selection, estimated to be worth US$935 million over three years, is subject to the execution of definitive agreements." [Read news release]

Ya know, I'm no rocket scientist but I have looked pretty hard trying to find out what the fuss is all about. The rational thinkers with the wait-and-see attitudes, much like the Chicks, are going to hang back and wait for the rebound, which by the way, appears to be happening already.

It is incredibly important that we learn from this experience. It's only human to get a little worked up when the market crashes and your biggest investments are in a downward spiral. But you could ease some of those concerns if you just dig deeper. There's an old saying about waiting out the storm. I think it's fair to apply it here. If you can begin to comprehend the actualities, you can overlook the myths. I know I've said it before, but knowledge is power. So always dig a little deeper. You won't lose as much sleep, and you probably won't lose as much money either.