MARKET BEAT / TOM PETRUNO : Tech-Stock Bargains May Lurk Out There
That Rodney Dangerfield of industries--high technology--once again finds itself in Wall Street’s doghouse as fall approaches.
Many tech stocks have plunged from their spring peaks, and earnings expectations are nearing rock-bottom for much of the group.
Yet traditionally, this is exactly the time to start rummaging around for bargains in tech. Few stock groups have performed as predictably over the past decade--soaring in fall and winter, peaking in mid- to late spring and crashing in summer. It’s happened that way in more years than not in tech.
This year, however, tech-stock investors may have to pick more carefully than usual from among the downtrodden issues. Sharp autumn and winter gains, if they come, could be unevenly distributed within the group--though there will certainly be big winners.
Why the caution? A couple of forces are at work:
* While many tech stocks are down significantly from their record highs in the spring, there hasn’t been the horrendous, broad selloff that the industry’s bears expected earlier in the summer.
Despite slowing sales of computers and other high-tech equipment in recent months, many investors are betting on a global economic recovery by early 1992--so they’ve been reluctant to sell many of their tech issues. That means that the group’s upside potential could be restrained.
* Wall Street is worshipping new growth-stock gods this year: health-care and specialty consumer businesses. Biotech, medical equipment and deep-discount retailing, in particular, are the businesses that growth-stock managers are focusing on, and they may continue to do so into 1992, at tech stocks’ expense.
Indeed, one gauge of Wall Street’s fickle attitude toward tech is the roster of companies that will make presentations at the 21st annual Montgomery Securities investment conference, which kicks off today in San Francisco.
Investment managers once flocked to the Monty show to hunt for hot tech companies, given the conference’s proximity to Silicon Valley. But this year, tech firms make up fewer than one-quarter of the 120-some presenting public companies.
Far more prevalent on the 1991 roster are up-and-coming medical and consumer companies such as biotech firms Amgen and Synergen, retailers such as 50-Off Stores and Smith’s Food & Drug, and entertainment firms such as Carnival Cruise.
The conference focuses on growth stocks, and fewer tech companies qualify as pure long-term growth plays these days, argues John Skeen, Montgomery’s research chief. “Technology has proved to be more cyclical than people thought,” he says.
That is true, of course: Consumer and business spending on computers, software, electronic workstations, printers and other products that Wall Street collectively labels “tech” has ebbed and flowed since the mid-1980s. Product life cycles keep getting shorter, and competition has mushroomed.
What’s also cyclic is Wall Street analysts’ sentiment toward tech. Inevitably, they begin boosting their earnings estimates for the companies each fall, the traditional time for new tech-product rollouts. That optimism builds throughout the winter, which gets investors excited about the stocks and pulls prices up.
But by spring, analysts have usually proven to be too optimistic, the companies disappoint and the stocks begin slipping. Then summer comes--always slow for computer sales--and soon no one wants the stocks.
That cycle continues to play itself out this year. On Sept. 13, semiconductor giant Intel Corp. said its quarterly sales would be flat, sending its stock plunging $6.75 to $43.
Late last Friday, Chatsworth-based Micropolis Corp. forecast “significantly lower” quarterly sales and said it would post a net loss for the period. Micropolis makes disk drives, which record, store and retrieve information within a computer. The company’s stock closed at $6.75 Friday before the announcement. The price was as high as $18 earlier this year.
Other such bombs are likely to go off in the next few weeks. Still, many analysts believe that much of the disappointing news about the summer quarter is already reflected in tech stock prices.
“I think people are prepared for the third quarter to be bad,” says Michael Murphy, editor of the California Technology Stock Letter in San Francisco.
It’s even possible that analysts have become too gloomy about some stocks. Last Thursday and Friday, Adobe Systems’ stock rocketed a total of $9.25, to $54, after the company reported earnings up 22% in the quarter ended Aug. 30. Adobe produces software used to print text and graphics via top-of-the-line printers.
The big question is whether the current weakness in computer sales will persist into the fourth quarter--or worse, into 1992. Investors who cling to such stocks as AST Research, a personal computer maker, and Teradata, which makes big corporate systems, figure the global economy will resurge in ‘92, fueling a new boom in tech equipment purchases.
If that recovery begins to appear in doubt as fall wears on, tech stocks could drop much more. But then, the stock market overall would be in trouble as well.
Rather than try to predict the economy, many professional tech investors are attracted to companies whose products are gaining market share despite a slow sales environment. Even if the broad market tumbles this fall, the hot-product tech stocks should be first to rebound in 1992, the pros figure.
* Roy McKay, manager of the $580-million Scudder Development stock mutual fund in New York, is sticking with firms in certain fast-growing software and “networking” businesses (networking companies sell systems that link computers and other machines within an entire company or office building).
He particularly likes networker Cabletron Systems. “I think their earnings are going to surprise people,” McKay says, as networking explodes. He sees the company earning $1.90 a share this year and $2.40 next year, which puts the stock ($49.50 Friday) at 21 times next year’s earnings estimate.
* Datron Systems is one of Mark Matheson’s favorites. Matheson, research chief at brokerage Cruttenden & Co. in Irvine, says Simi Valley-based Datron is considered a defense stock because it does considerable business with the Pentagon in such areas as satellite communications antenna systems.
But the real excitement is Datron’s growing business in phone-poor Third World countries as a supplier of radio communications equipment, Matheson says. He sees the company earning $1.80 a share this year, which means that the stock (at $15 now) sells for a mere eight times earnings.
* John Ballen, manager of the Lifetime Emerging Growth stock mutual fund in Boston, is keeping his $130-million fund about 30% invested in tech stocks, especially in such software firms as Adobe, Autodesk and System Software. Computer sales may slow, but the need for improved software is unabated, Ballen notes. With many of the software stocks down significantly from their 1991 highs, he thinks that they make a lot of sense for bargain hunters willing to wait for the economy to perk up next year.
True, health-care stocks have stolen tech’s spotlight for now, Ballen admits. But investors will return to tech as soon as they see a new growth cycle, he says: “My general thesis is that tech will be the best-performing group coming out of the recession--whenever that is.”
Tech Stocks: Time to Buy Again?
Shares of many technology companies suffered the usual summer plunge, as orders slowed and spring profit expectations proved far too optimistic. But fall is traditionally the period when the stocks bottom, then roar back to life. Here’s a look at the damage so far:
Fri. Drop from Stock close ’91 peak Beaten Down Intel 42 1/4 -29% Apple Computer 50 5/8 -31% Conner Peripherals 19 -36% System Software 21 -44% Cadence Design 18 1/2 -47% Compaq 32 1/8 -57% Micropolis 6 3/4 -63% Minor Selloff Exabyte 22 7/8 -12% Datron Systems 15 -14% Adobe Systems 54 -14% Hewlett-Packard 48 3/8 -15% DH Technology 10 1/8 -16% AST Research 27 1/2 -16% Sun Microsystems 30 3/4 -20% Still Hot Novell 36 3/4 -- Microsoft 86 1/2 -1% Data General 20 1/8 -4% FileNet 18 5/8 -6% Cabletron Systems 49 1/2 -6% Teradata 22 3/4 -7% Cray Research 41 1/4 -7%
