Summertime, and the Living Is Uneasy for Technology Stocks
At The Times’ Investment Strategies Conference at the end of May, fund manager Garrett Van Wagoner, considered by many to be a superstar stock picker, frustrated a conga line of audience members.
One after the other, they stepped up to the mike and asked for his opinion of a tech prospect. Some he liked, some he didn’t, but each answer ended with the same caveat: He wouldn’t get near it between June and September.
Van Wagoner, whose flagship Emerging Growth fund has advanced 121% from New Year’s through Friday, was referring to the notorious summer swoon that, according to Wall Street lore, afflicts technology stocks annually.
“Some time between Memorial Day or July 4 and Labor Day we have a pretty good crack in tech stocks--maybe it happens twice,” Van Wagoner said last week. “Last year, the decline started about this time.” Indeed, the tech-laden Nasdaq composite and the Morgan Stanley High-Tech indexes lost more than 25% of their value between mid-July and late August 1998.
Last week’s tech temblor seems to have arrived on schedule. The ascent that took the Morgan Stanley gauge up 178% between Oct. 8 and July 16 abruptly reversed, even as tech stars posted second-quarter earnings that blew past Street estimates. But as the gains accelerated in June and early July, the mood was exuberant rather than anxious. Clearly, not everyone assumes that tech stocks wilt in the heat.
Nick Moore, senior technology analyst at Jurika & Voyles, a large money management firm in Oakland, calls the notion of the summer slump “a myth. Summer is a quarter,” he said, “and there’s a rally in every quarter and there’s also a pullback in every quarter.”
Moore recalls that during the ‘80s, when corporate computer sales defined high tech, the stocks sold off in the summer like clockwork, following customers’ order patterns. Now with year-round markets such as communications soaking up sales, the cycle has moderated. “If you weigh the ‘90s data more heavily than the ‘80s data, you would not build a strong case,” he argued.
Nevertheless, Moore is as aware as anyone of the risks that come out of hibernation at midyear. Corporations still tend to purchase less in the summer, and so do consumers, who more often pry open their PC purses for the back-to-school and Christmas seasons. Sales wane overseas as Europe goes on vacation en masse. Consequently, the computer industry treads water in the dog days and schedules its big product introductions for the fall.
Moore is right, however, when he says the data are unconvincing. Ambiguous might be a better word.
The broad market as measured by the S&P; 500 index has boomed historically from November through April and stagnated from May through October, according to veteran market researcher Yale Hirsch. On the other hand, the performance of the Pacific Stock Exchange technology index has been strikingly level in the third and fourth quarters dating back to 1983, according to PSE Managing Director Brad Zigler.
During the ‘80s, the PSE index lost ground four times from June through September. During the long-term bull market of this decade, the index advanced in that period every year after 1990.
In the early weeks of summer ‘99, everything had been going right for the tech group. Then the momentum shifted as earnings started appearing. Even the enviable results boasted by the bellwethers--Yahoo, IBM, Lucent and others--provoked energetic selling.
“Since the fall, we have gone about as far as tech rallies are able to go historically,” Moore said. “The stocks have had such a big run, you already had these great earnings priced in. You got paid for them in June and early July.”
If there was one event that led investors to the panic button, it was Microsoft’s characteristically grim assessment of the industry’s outlook after the company reported another blowout quarter Monday. It seemed like the last of the good news followed by the beginning of the bad.
“After getting done with the big numbers from companies like Microsoft and IBM,” Van Wagoner said, “people are wondering, ‘Now what?’ They’re starting to look at things like the Fed’s policy and the impact of year 2000 issues on spending.”
Van Wagoner, known as one of the more price-conscious managers of high-growth portfolios, said he rotated into health care after selling some of his semiconductor and telecom names before earnings season. He also dumped most of his Internet stocks in April, he said.
It may be a surprise that Net issues are subject to the seasons too. Traffic and e-commerce are growing, but not at a uniform pace. As the Web becomes a mass-market phenomenon, noted Alan Braverman, chief of Internet research at Banc of America Securities, it’s pushed and pulled by wider trends in usage, advertising and retail.
“Advertisers gear up for the big Christmas quarter, so ad-driven business models tend to show that seasonality,” he said. “If you look at consumer behavior, when the weather is nice, fewer people are at their computers. More new people come to the Internet in the first and fourth quarters, and they average more time online.”
As a result, growth rates reported by tracking services such as Media-
Metrix tend to flatten in the middle of the year, which dampens the giddiness that periodically drives Net stocks to outlandish heights.
Though bearish short-term, Van Wagoner, Moore and Braverman expect tech stocks to heat up again when the weather cools down. Van Wagoner is more worried than Moore about the y2k bug, but that could create bargains, in his view.
He likes some high-powered small stocks that recently went public, such as e-commerce software vendor Ariba and DSL specialist Copper Mountain.
“We haven’t had the gumption to get them at these prices,” Van Wagoner said. “Their valuations are surreal. But we think we will get the chance.”
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Times staff writer Edward Silver can be reached at edward.silver@latimes.com.
