Tech Stocks Are Still Up--Making Some Folks Wary
Everybody loves technology stocks. And what’s not to love?
Item: Shares of semiconductor equipment makers--the firms that supply machinery to computer chip producers--rocketed Tuesday after the companies’ trade group reported a 58% surge in February sales compared to a year ago. FSI International, a $10 stock a year ago, shot up $3.625 to a record $42.75 on Tuesday on Nasdaq.
Item: Oracle Corp., a leader in database software used to store and retrieve huge amounts of information, reported Tuesday that earnings soared 50% in the quarter ended Feb. 28.
Item: Edward Yardeni, economist at C.J. Lawrence/Deutsche Bank Securities in New York, reports that U.S. production of computers has risen 106% over the past three years, whereas production of business equipment in general is up 29%. Yet the computer boom isn’t over, Yardeni says. “The U.S. economy is on the verge of a major technological revolution,” he promises.
If the revolution is yet to come, one wonders what to call the last five years. In Wall Street’s view, technology has been the industry of the ‘90s.
Tech shares as a group have risen faster than any other major stock industry group since 1990: An index of 50 Silicon Valley stocks tracked by mutual fund firm Franklin/Templeton has zoomed 280% in price, compared to a 50% gain in the Standard & Poor’s 500 index of blue-chip stocks.
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But with the tech bull market entering its fifth year, nervousness is acute among many investors. There’s a feeling that this boom has to end soon, if for no other reason than because it has gone on for so incredibly long. Almost every business is cyclical in one way or another, after all.
The calendar isn’t helping tech stock phobics: Traditionally, when tech stocks take a fall, they do it in spring and summer, because the weakest time for computer sales usually is summer.
So why do the stocks keep rising? The bulls say it’s because there’s still no hint of a meaningful slowdown in world demand for tech equipment, a business America dominates. Which means that when money managers look for companies with strong growth prospects, tech still reigns supreme.
Dan Leonard, manager of the Invesco Technology stock fund in Denver, was among the record 2,000 attendees at the Robertson Stephens Technology ’95 stock conference in San Francisco at the end of last month, at which 208 tech firms made presentations. “The mood I picked up is that business is great right across the board,” Leonard said. Even allowing for the usual corporate hyperbole, he says, it would have been hard to leave the show feeling bad about tech’s future.
Harry Lange, manager of Fidelity’s Select Technology stock fund in Boston, thinks that sales of personal computers--the locomotive of tech growth--will rise 20% this year worldwide, with the strongest growth in Europe and Japan. “They are far behind us in PC utilization,” Lange says, and have little choice but to catch up.
But might that growth already be fully reflected in tech stocks’ prices? Not necessarily, Lange says. Some tech stocks’ price-to-earnings ratios are actually lower than what they were two years ago, he says, simply because earnings have in many cases risen faster than the stocks’ prices.
Still, some investors are leery. “There aren’t many tech companies that are selling at a discount to their intrinsic value,” argues Carlene Ziegler of Artisan Partners in Milwaukee. Buying tech stocks at these prices entails “a lot of risk,” she says.
Lange allows that a short-term selloff in the stocks is inevitable. Twice last year tech shares pulled back 10% to 15%, on average, he notes. Yet they still roared back to close 1994 sharply higher. So his advice remains: Buy on any weakness.
But the longer this bull market in tech goes on, the great danger is that the stocks will become grossly over-owned. Once everybody has the stocks--and no one’s left to buy--any turn in the fundamentals of the business could produce a blood bath as the herd stampedes for the exit.
The implications for the broad market could be devastating as well. John Rekenthaler, analyst at mutual fund-tracker Morningstar Inc. in Chicago, says that tech stocks now make up 16% of general stock funds’ assets, a historic high. Given the infamous volatility of tech issues, he worries about the risk to the funds--and the reaction of shareholders--when tech’s bull run finally ends.
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How Much Better?
An index of 50 Silicon Valley stocks tracked by mutual fund firm Franklin/Templeton has dramatically outpaced the Standard & Poor’s 500 index of blue-chip stocks every year since 1991. Index price changes each year:
1995*
Silicon Valley 50: 19.7%
S&P; 500: 7.8%
* Year-to-date
Source: Franklin Advisers Inc.
