Shibboleths and Sympathy Stocks

09/22/00 02:07:43 PM

by David Penn

Comparing the performance of Cisco Systems and Juniper Networks for much of 2000 suggests that number two is not always second place.

Security: JNPR
Position: N/A

I come to praise Cisco Systems, not to bury them. It's Juniper Networks' job to do the burying.

One of the often-proclaimed no-no's in stock selection has to do with selecting what are called "sympathy stocks". Sympathy stocks are generally stocks in the same industry group and sector as leading stocks, but are usually less profitable, less traded, and less well-known. As such, sympathy stocks often become popular when the leader of their respective group or sector is perceived to be overbought or overpriced. The thinking in purchasing sympathy stocks is really very similar to that of buying generic goods instead of name brands. Why pay more, the thinking goes, for a brand name product that does the same thing as the generic version?

Often in the retail world, that kind of thinking can pay off. However, the annals of the stock market are filled with investors who, once upon a time, chose Corel because Microsoft was overbought, or bought iVillage as an Internet play because Yahoo! seemed a bit pricey. Unfortunately, Corel and iVillage are near all-time lows, whereas Microsoft and Yahoo! have shined. This phenomenon has led to the conventional wisdom that it is far better to spend the money for the quality merchandise (i.e., the group or sector leader) that is likely to last, than to throw good money at also-rans simply because they are inexpensive (at least, relative to the leader).

Graphic provided by: BigCharts.

Juniper Networks [JNPR] is a far cry from an also-ran in the routing business. But in the same way that some good boxers have the mixed fortune of fighting in the same era as great ones, so is Juniper Networks usually overshadowed by everybody's favorite "wish I'd bought it back when" stock, Cisco Systems. However, close comparison of the recent performance of both companies suggests that if Cisco is starting to become a mature, grown-up corporation not prone to upside price tantrums, there may be plenty of adolescent pep left in Juniper.

Look at the above chart, which compares the performance of Juniper Networks to both Cisco Systems and the Nasdaq. While all three suffered through the spring downturn, Juniper Networks has outperformed Cisco Systems and the Nasdaq quite dramatically in the second half of the year. Even taking into account the bears of September, Juniper is outperforming both Cisco and the Nasdaq by a significant margin.

Other aspects of Juniper make it an attractive stock. It is outperforming both its 50- and 9-day moving averages, and it trades on an average volume that is less than a fifth of Cisco's. This makes Juniper much more responsive to buying (and selling) pressure than Cisco, which has a much larger market capitalization--$417.9 billion compared to $67.8 billion--as well. Those kicking themselves for missing out on Cisco Systems' dramatic advances in the late 1990s might find their aggression put to better use by spending the early 2000s pursuing Juniper.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Shibboleths and Sympathy Stocks

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