When do battered technology stocks become too cheap to ignore?
On Tuesday, some investors decided they couldn't stay away any longer. Computer chip maker Micron Technology, a $94 stock in September, fell as low as $60 on Tuesday morning but ended the day at $67.625.
Hewlett-Packard, one of the premier names in electronics, fell as low as $73.75 on Tuesday before triggering a buying riot that lifted the stock over $78 by the close.
After a string of disappointing earnings projections Friday and Monday from such tech giants as Novell, BMC Software and Motorola, Tuesday brought some good earnings news from computer disk drive leaders Seagate Technology and Read-Rite, and from chip maker Alliance Semiconductor.
Seagate and Alliance reported quarterly results that were ahead of expectations, and Read-Rite said its results for the quarter ended Sept. 30 also will beat estimates.
The importance of those announcements was simply in reminding investors that technology companies' sales and earnings aren't collapsing across the board. That may not be enough to keep the stocks from falling further in the weeks ahead, because tech stocks' gains have been so huge this year that the profit-taking urge is overwhelming now. Momentum works both ways, after all.
But if investors can still count on decent earnings growth within the technology sector in 1996, the bottom for many of the stocks may not be that far off.
"This is a chance to really upgrade your portfolio," argues Michael Murphy, editor of the California Technology Stock Letter in Half Moon Bay, as he surveys the wreckage among tech shares.
Naturally, investors' nerves are frayed. Didn't Motorola warn Monday that its cellular phone business is weakening? Yes, but competitor Nokia doesn't appear to be suffering, says Russell Crabs, research chief at SoundView Financial in Stamford, Conn. Sounds like a product-specific problem to him.
Similarly, while BMC Software blamed its sales shortfall in part on weaker demand for mainframe computer software in Europe, personal computer makers aren't in the same boat. "PC vendors are saying that European demand is quite strong," Crabs says.
The point is that it's wrong to extrapolate what may be individual company problems into some overriding statement about "demand for technology." The industry has never been more global, nor the number of products and applications broader, nor the number of users more diverse.
Wall Street has been throwing all of the stocks out the window in recent weeks, just as it indiscriminately bid them all higher during the summer mania. Eventually this selling panic will give way to a reasoned analysis of individual companies' prospects. And where earnings growth still looks good for 1996 and beyond, investors will take notice again.
Dan Leonard, manager of the Invesco Strategic Technology stock fund in Denver, notes that Micron Technology's earnings are expected to surge from $3.79 a share this year to $6.64 a share in 1996--a 75% rise--as demand for the company's memory chips continues to outpace supply.
Even with new production coming on stream, "there is still more demand than capacity" for memory chips, thanks to faster new computers and computer applications that require far more memory than their predecessors, Leonard notes.
Maybe Micron was overpriced at its recent peak level of $94.75, when it sold for 14 times the $6.64-a-share consensus Wall Street earnings estimate for 1996. Now, at $67.625 a share, the stock's price-to-earnings ratio based on that '96 estimate is a mere 10.
Is that still too expensive? If you think those 1996 earnings estimates are bound to come down, there's certainly a good argument for waiting to buy. But at some point, even if 1996 estimates are lowered somewhat, many tech companies still will be on track to post healthy growth compared to 1995. And that is more than many companies in other industries may be able to boast.
As tech stocks plummet, the good news is that earnings-disappointment risk is gradually wrung out of them. Tech issues overall may not yet have bottomed, but with prices already down 30% or more in many cases, this may be a good time for discriminating investors to start nibbling.
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If you believe analysts' 1996 earnings per share (EPS) estimates--a big "if"--here are price-to-earnings ratios (P-Es) for key tech stocks based on Tuesday's share prices.
Stock Est. '96 EPS '96 P-E Cabletron Systems $3.53 18 Hewlett-Packard $5.42 14 Intel $5.12 12 Computer Assoc. $3.34 12 Sun Microsystems $4.87* 11 Compaq $4.55 10 Micron Tech. $6.64 10 IBM $12.20 7 Seagate Tech. $6.43* 6
* for fiscal year ended June, 1997
Source: Zacks Investment Research