Bottom-Fishing for Techs? Be Choosy
Texas Instruments Inc. is 35% off its recent high. Applied Materials Inc. is 44% from its peak. Even mighty Intel Corp. has slumped 29% from its record close.
Is it time to go bottom-fishing?
Every time stocks fall hard these days, that’s the first question individual investors ask. And few sectors have been slammed more severely than technology.
Indeed, experts say, now may be a good time to begin sifting through the wreckage. After plummeting two weeks ago, techs showed flickering signs of life last week, including a rebound from dire lows on Friday. On Monday, techs moved again as semiconductor, personal computer and Internet companies gained.
But be patient and extremely choosy, experts say. While some good companies are cheap compared with their late-summer highs, professional investors thus far have done a lot more window-shopping than actual buying.
“When you get into a market like this, no one wants to step up and catch a falling knife, and, as a result, picking a bottom is very difficult,” said Stephen Granoff, an analyst at John Hancock Global Technology Fund.
That’s borne out by the way the market has acted recently.
Twice last week, the tech-heavy Nasdaq composite started out strong, but then steadily gave up ground the rest of the session. That happened to a lesser degree on Monday as well.
Such a trading pattern suggests investors are indeed trying to pick up tech shares on weakness. But each time they move in to buy, they’re overwhelmed by sellers anxious to get out.
Tech stocks were pummeled Oct. 27 when the expanding Asian crisis struck Hong Kong. The sector clawed its way back in the next six weeks but dove again two weeks ago when Oracle Corp. unleashed its surprise profit warning, blaming Asia for part of its woes.
The Oct. 27 drop put the perils of bottom-fishing on display. Small investors jumped at the chance to buy on weakness that day even as pros snubbed the market.
That seemed like a prescient strategy when stocks rebounded and the S&P; 500 hit a new high Dec. 5. But the market has been queasy lately as Wall Street worries that Asia’s financial woes may scrape away at corporate profits more than was initially estimated.
Indeed, some pros say this is a dangerous time to play in tech. Stocks have not come down that much, considering the potential problems from Asia and worries about slowing demand in the U.S.
“It’s never a good idea to bottom-fish unless you have real value,” said Fred Hickey, who writes the High Tech Strategist, a Nashua, N.H.-based newsletter. “And I don’t see a lot of value here right now.”
Tech bulls say the fear is overdone. For example, even though its earnings missed estimates, computer products maker Solectron Corp. soared 20% a week ago when the results seemed to show sales haven’t been tainted by Asia.
The key for individual investors, experts say, is to buy quality companies with a two- to three-year time horizon.
“This is not to say there’s not risk out there. . . . But long-term fundamentals still look attractive in a lot of tech areas,” said Rod Berry, an analyst at the Robertson Stephens Information Age Fund.
The most controversial sectors right now are semiconductors and chip-making equipment. After a sparkling 12-month rise, the chip sector peaked in mid-August and was treading water even before October. Asia amplified worries about chips because of the potential that companies in the region will delay orders.
The Philadelphia Stock Exchange semiconductor index slumped a staggering 35% from its high in mid-August to its low last Thursday.
“We haven’t seen the last of the capital-spending cutbacks, so it’s tough to like the equipment companies,” said Richard Goers, chief technology strategist for the Kemper Funds.
Others disagree. Although order delays are a legitimate fear, most companies claim not to have that problem, Berry said. What’s more, there’s limited downside at current prices, he said.
Semiconductor companies, including Lattice Semiconductor Corp. and Linear Technology Corp., have bounced off their lows the last two sessions, as has chip equipment maker KLA-Tencor Corp.
Berry recommends Applied Materials and KLA-Tencor. Among chip companies, he favors Intel and Xilinx Inc.
John Hancock’s Granoff likes Applied Materials and PRI Automation Inc., which automates chip-fabrication assembly lines.
Berry also suggests companies involved in wireless communications. Many of these, like chip makers, have been hit hard because they do a lot of business with Asia. But unlike in the U.S., where it’s considered an extravagance, wireless service is viewed as more of a necessity in Asia because many areas lack traditional wired phone service, he said. His picks: Qualcomm Inc. and Digital Microwave Corp.
Michael Murphy, editor of the California Technology Stock Letter in Half Moon Bay, says that even though Asia is weakening, Europe seems likely to strengthen next year. He likes Integrated Device Technology Inc., which is making microprocessors for the new generation of sub-$1,000 personal computers. He also favors Cypress Semiconductor Corp., which he said is having problems filling all the orders it has for a type of chip.
Several experts also like the computer services field. Business is growing, as companies need help with complex computer networking and grapple with the so-called year 2000 problem.
Kemper’s Goers recommends Gartner Group and Keane Inc.
“People need help with their software for a number of reasons, including the year 2000 problem, and that doesn’t go away” because of Asia, he said.
Newsletter writer Hickey also likes Intersolv Inc. and Segue Software Inc. Segue has $5.50 a share in cash and is undergoing a restructuring, Hickey said.
“I’m buying it here for a few dollars above cash,” Hickey said. “It has a new president who’s taking action, and it’s a turnaround play.”
Hickey also is buying Caere Corp., which makes optical-character-recognition software for computer scanners. The stock has been stuck in a narrow trading range for three years. Investors have soured on it because scanner prices have come down in recent years, dragging the price of Caere’s software with it, Hickey said.
But prices for its products have stabilized, and rising unit-volume sales of scanners mean Caere’s earnings should jump, he said.
“They’re nicely profitable, and I think they’ll beat estimates this quarter,” he said.
What should investors stay away from?
Disk drive makers such as Seagate Technology Inc. and Western Digital Corp., which are struggling with a pricing war and have warned of disappointing fourth-quarter earnings, experts say.
Also, don’t take a chance with second-tier companies within an industry. Goers, for example, likes Cisco Systems Inc., the premier company in the networking field, over competitors such as 3 Com Corp.
Street Strategies explores investment tactics. Times staff writer Walter Hamilton can be reached at walter.hamilton@latimes.com
A panel discussion on selecting technology-sector stocks will be among the subjects addressed on the first day of the Los Angeles Times Investment Strategies Conference, Feb. 7-8. Registration is available by calling (800) 350-3211 or online at https://www.latimes.com/isc. Enrollment is limited.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Is This a Bottom?
Many large technology stock prices have slid below the levels of Oct. 24, the session before the “Gray Monday” sell-off. Investors have been reluctant to jump back into the volatile sector because of concerns about Asia’s continuing financial turmoil. But some analysts say prices have reached levels where they’re attractive.
*--*
% change Ticker 52-wk. 52-wk. Oct. 24 Monday versus Stock symbol high low close close Oct. 24 Cabletron Systems CS $35.50 $13.94 $30.00 $14.13 --52.9% Oracle ORCL 38.25 21.94 33.94 21.75 --35.9 3 Com COMS 55.72 30.31 45.81 32.75 --28.5 Bay Networks BAY 41.00 23.38 31.63 23.56 --25.5 Adobe Systems ADBE 51.98 34.69 49.25 37.19 --24.5 Compaq Computer CPQ 78.25 54.50 68.75 54.63 --20.5 Texas Instruments TXN 70.50 40.88 55.94 46.13 --17.5 Dell Computer DELL 102.88 72.00 93.94 81.63 --13.1 Intel INTC 102.00 62.88 80.00 71.44 --10.7 Applied Materials AMAT 52.75 26.13 33.27 30.50 --8.3 Microsoft MSFT 150.75 80.00 135.38 127.00 --6.2 Computer Assoc. CA 56.94 45.67 52.20 52.00 --0.4 Cisco Systems CSCO 60.30 48.55 53.50 54.63 +2.1 America Online AOL 91.13 31.75 87.19 90.00 +3.2 Sun Microsystems SUNW 50.88 31.75 37.56 39.81 +6.0
*--*
Source: Times Research
