It’s Too Soon to Play Requiem for Technology Boom
Even for a usually volatile stock like Texas Instruments, Tuesday’s trading action was a white-knuckler.
After opening the day at $70.25, TI’s shares plunged as low as $66.50 as rumors swept Wall Street about supposed price cutting by Taiwanese makers of certain computer memory chips. As some investors looked a little closer and decided the discounting wasn’t of major significance, TI rebounded to close up $1.125 at $72, and most other big tech stocks also recovered their losses.
That kind of volatility has been more the rule than the exception for technology stocks over the past month, as their red-hot rally of winter and spring has finally lost its momentum. After rocketing almost straight up between January and mid-July, many tech stocks have been churning wildly in recent weeks. And the general trend has unmistakably been down.
Shares of computer-chip giant Intel, for example, have slumped nearly 25% since reaching a peak of $78.375 in July. Back then, investors couldn’t seem to own enough Intel. Today, at $58.875, many people evidently feel they own too much.
The pullback in key tech issues has been blamed for the weakness in the stock market overall since mid-July, although until this week the market’s troubles were concentrated in blue-chip stocks. Smaller stocks, including many smaller technology issues, were reaching new highs as recently as last week. Now the sellers seem to have the upper hand in every corner of the market.
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To which more than a few veteran investors reply, “So what?” Their point is that some investors--novice and pro--are talking about the summer breakdown of technology stocks as if it must be some critical turning point in market history. It could be--but more likely it’s just a typical and long overdue “correction” in a group of stocks that got ahead of itself.
“This has to be viewed in the context of the doubling or tripling that occurred in these stocks” this year, says Eugene Peroni, analyst at Janney Montgomery Scott in Philadelphia.
To put it more bluntly, the last few weeks have demonstrated that stocks don’t just move in one direction. That shouldn’t exactly be a revelation to anyone, but the tech stock boom was so dramatic in the first half of the year that it began to appear as if the shares might never decline meaningfully.
Now that Wall Street has again witnessed gravity at work, what’s next in the tech stock saga? If history is any guide, the stocks’ selloff could get a lot worse near-term--and yet the tech group would still be in a long-term bull market.
Consider: So far, an index of 200 tech stocks tracked by San Francisco brokerage Hambrecht & Quist is down 5.4% from its all-time high reached Aug. 18, which means a lot of the stocks have avoided the deep declines experienced by Intel, Microsoft and Compaq, among others.
Yet the H&Q; index plummeted 14.4% between February and July of 1992. In 1993, a January-to-April selloff clipped 10.9% off the index. And in 1994, the index declined 12.7% between February and June.
Each of those selloffs was brutal. But they were all temporary--normal occurrences as investors’ interest in tech waned after sharp run-ups in the stocks. And despite those declines, the H&Q; tech index still finished every year between 1991 and 1994 with a bigger gain than the S&P; 500 index.
Is this selloff different? The technology bears naturally think so. They say the frenzy for tech stocks this year marks the end of the long bull market in those shares. Earnings growth is peaking for many of the companies, the bears say. Computer sales are bound to slow, they say; new competition will shrink profit margins. Etc., etc.
The bulls can only sigh. “Fundamentally there is absolutely nothing different about technology this week than last week,” says Lise Buyer, who helps manage the T. Rowe Price Science & Technology stock fund. The world still wants and needs new technology. Individual firms come and go, but as an investment concept, she says, “the secular tail wind behind technology is very strong.”
Have some tech stocks become temporarily overvalued? Undoubtedly. But then, you’re paying a higher price relative to earnings per share for most stocks today, compared to a year ago. And many tech companies’ growth prospects still appear superior to most other companies’.
How much is too much to pay is Wall Street’s oldest question, and it has no pat answer. But it’s usually a good idea to step aside (or sell) when everyone wants to own something. And as people run away from stocks with solid long-term fundamentals, that’s the time to buy. If euphoria over technology continues to give way to despair, smart investors will be looking for the inevitable opportunities that produces.
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Pulling Back
Many individual technology stocks are already down more than 10% from their 1995 highs, though broad tech stock indexes haven’t yet fallen dramatically. *--*
1995 Tues. Pct. Stock high close decline Xircom $19.00 $11.88 -37.5% Digital Link 34.00 24.50 -27.9% Intel 78.38 58.88 -24.9% Microsoft 109.25 91.88 -15.9% Compaq 54.75 46.13 -15.7% Ascend Commun. 74.75 63.75 -14.7% Apple Computer 50.13 43.13 -14.0% Parametric 59.50 51.75 -13.0% Texas Instruments 82.13 72.00 -12.3% Seagate 49.38 43.63 -11.6% IBM 114.63 102.38 -10.7% H&Q; tech index 751.94 710.99 -5.4%
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