High Tech: Reality Check Due
High-technology stocks, the stars of the first quarter, suddenly are leading Wall Street’s “uh-oh” list.
That’s uh-oh, as in, “Uh-oh, the company just said earnings are going down instead of up. There goes the stock price.”
Thursday, two more tech companies that had been on a lot of brokerage “buy” lists announced that they will fall short of analysts’ earnings expectations for the recent quarter:
Tandem Computers, which makes high-performance “un-crashable” computer systems, said revenue in the quarter ended March 31 ran below the bullish levels it had expected. As a result, the company warned that quarterly earnings will be below the 29 cents a share earned in the Dec. 31 quarter, though still above the 17 cents earned in the first quarter of 1989.
Investors gave Tandem no quarter: The stock plunged $4.625 to $22.625, a drop of 17%.
ADAC Labs, a producer of medical imaging equipment, announced that earnings for the last quarter will be substantially below year-earlier levels because of growing competition and tighter hospital budgets. The stock slumped 62.5 cents to $1.125, a loss of 36%.
Meanwhile, Businessland Inc., a computer retailing chain, said Thursday that its operations probably just broke even in the March 31 quarter because of “inventory adjustments” and lower profit margins at stores outside the United States. Businessland stock tumbled $1.50 to $8.875.
The latest announcements follow a spate of disappointing sales and earnings projections from other tech companies, including software hotshot Oracle Systems and voice-mail equipment maker Digital Sound Corp. And they all raise one big question: Is the high-tech group overall going to make fools out of the investors who jumped into the first-quarter rally, believing that there was value in the beaten-down stocks?
The simple answer is that the only way that can happen is if the economy was far weaker in the first quarter than most people now estimate. And if that was the case, earnings will look lousy everywhere. So a lot of people will feel foolish.
The better way to digest the latest disappointments, veteran tech investors say, is to realize that high tech is a big universe, and at any given time some companies are bound to be running into trouble. Though the disappointments are getting the attention now, it was just three weeks ago that Apple Computer announced that its first quarter would be better than expected, partly because of stronger sales, notes analyst Bruce Lupatkin at Hambrecht & Quist in San Francisco.
Of course, that’s little consolation to someone who just bought Tandem at $27 a share. But investors buying Tandem, Apple, Oracle or any other tech stock should be following the cardinal rules of investing in volatile fields like this one. That is, you never sink a big share of your portfolio into one of these stocks; you diversify like crazy, and, if you’ve made a lot of money in a short period, you take some profits.
Tech companies, for all their promise, have to be approached differently from many other industries, said Roger McNamee, who runs T. Rowe Price Associates’ Science & Technology stock mutual fund. “What we’ve seen is a reality check in the last 10 days,” he said. And reality is that “these are very difficult businesses to run for quarterly earnings.”
Because tech product order cycles can be so unpredictable, most tech company managers know they’ll fail if they try to meet quarterly profit projections, McNamee said. Instead, they concentrate on meeting their annual targets.
McNamee owns Tandem stock and insists that the company has a hot line of computer products that solve the database and networking problems of many computer users. The latest quarter may not have been on target, he said, “but a year from now you’ll look back and say, ‘So what?’ ”
As for the tech group in general, despite its first-quarter surge, McNamee and other analysts still say the stocks’ price/earnings multiples are reasonable by historical standards. A stock that sold for 50 times annual earnings per share in 1983, at the peak of the last tech cycle, now may sell for 25 times earnings. “Valuations are anything but ridiculous,” Lupatkin argues.
Even so, if the recent tech frights make you look a little closer at your portfolio, good for you. Steven Gerber, analyst at Bateman Eichler, Hill Richards in Los Angeles, removed his “buy” recommendation on ADAC Labs on March 26--when the stock was at $2.625. (The stock had been as high as $6.25 last year.) Gerber’s feeling was that, though ADAC looked cheap relative to earnings, “It was expensive on a price/book value basis.” Meaning the assets backing up the stock price “left nothing to fall back on” if trouble developed, he said.
Moral: If you own tech stocks, this is a great time for a reality check of your own.
Europe’s New Confidence: Eric Miller, the seasoned chief investment strategist at Donaldson, Lufkin & Jenrette Securities Corp. in New York, recently returned from a trip across Europe. What he found in discussions with big money managers there is a significant shift in the way they approach U.S. stocks versus their own stocks.
“On the whole, European investors seem to be sold-out bulls regarding our market--expecting it to go up but not participating very heavily at present,” Miller said.
In other words, they think the U.S. remains a great place to invest, but they’re putting their money elsewhere just the same. And that “elsewhere” is Europe itself.
In the wake of the crumbling of the Berlin Wall, and in anticipation of the 1992 economic unification of the Continent, Europeans’ attitude toward their own economies and stocks has turned sharply, Miller found. “Never in the 20 years that we have made such trips have we seen optimism as high as it is now--especially in West Germany,” he said.
Not surprising, the West German stock market is up about 11% year to date, leading all major world markets. And if German investors are worried about their market getting too pricey, they aren’t showing it. “The German investors we met with are way under-invested in the United States,” Miller said. “They wonder why they should bother when the opportunities in their own country’s market still looked so appealing.”
“Talk of the future may have been less heady in Switzerland, Paris, Brussels and Milan--but not a whole lot less,” he said.
The bottom line seems to be this: There’s a strong likelihood that Europe is on the verge of being reborn economically. That means potential problems but also many opportunities. Any U.S. investor who hasn’t put some long-term funds into European stocks may be missing a great chance to make money. It’s easy enough to invest in Europe via stock mutual funds that focus on the Continent.
Briefly: Big bank stocks got hit Thursday as Prudential-Bache Securities analyst George Salem changed his “hold” ratings to “sell” for several banks, citing growing credit problems. Chase Manhattan was downgraded and fell 62.5 cents to $27.875. Bank of New York lost $2.50 to $31.25 on Salem’s ratings cut. Not mentioned but falling just the same: Security Pacific, off $1.25 to $35.625, and First Interstate, down $1 to $32.50. Most of the stocks are approaching their 52-week lows again. . . . Proof that stock splits attract new investors: Pasadena-based Jacobs Engineering, which split 2 for 1 Tuesday, jumped $1.625 to $22.75 Thursday, after rising 25 cents Wednesday and 62.5 cents Tuesday.
HIGH-TECH LETDOWNS
How some high-tech stocks have suffered after recently disclosing anticipated disappointment in quarterly revenue and/or earnings gains.
Price before Thurs. Stock bad news* close Change ADAC Labs $ 1 3/4 $1 1/8 -36% Oracle Systems 25 3/8 17 5/8 -31% Network Equipment 29 3/8 21 1/8 -28% Tandem Computers 27 1/4 22 5/8 -17% Businessland 10 3/8 8 7/8 -15% Digital Sound 10 8 1/2 -15% Chips & Technologies 21 1/2 18 1/2 -14% 3Com 15 1/8 13 1/8 -13%
* close just before news was announced
