For Tech Bulls, Will Small Doubts Soon Mushroom?
There are two words you never want to see strung together in a sentence referring to a company whose shares you own.
Those words are “substantial doubt.”
In particular, the use of those words by your company’s financial auditing firm--as in, “We have substantial doubt that the business can remain a going concern”--is probably the most chilling news you can ever hope not to receive.
Last week, auditors of two once-highflying Internet-based companies--online music retailer CDNow and health-care site Drkoop.com--separately issued statements warning that there is “substantial doubt” about the companies’ survival.
By the end of the week, shares of CDNow, which traded as high as $39 after their public offering in 1998, had fallen to $3.78 on Nasdaq. Drkoop.com, a $45 stock just last year, ended the week at $3.69.
Substantial doubts seemed to be in great supply across the entire technology stock universe for much of last week, as the Nasdaq composite index suffered a 10.2% plunge from Monday through Thursday before bouncing back 2.6% on Friday.
The first quarter overall still belonged to Nasdaq, however: The index rose 12.4% for the three months, while the Dow Jones industrials, despite a sharp rebound in recent weeks, lost 5% for the period.
But worrisome cracks have appeared in the tech-stock juggernaut over the last month. In the best cases, leading stocks of viable, profitable businesses, such as Intel, Motorola and Oracle, have pulled back 10% to 20% from their peaks.
In other cases, some previously hot stocks have now done a round-trip back to their levels at the start of the year. Biotech company Abgenix, for example, began the year at $132.50 a share, rocketed as high as $413 by early March, and now has slumped back to $138.13.
In the worst cases, investors have surrendered nearly all pretenses of hope for fledgling tech firms that seemed like great business ideas only last year.
The auditors of CDNow and Drkoop.com have voluntarily rung the death knells for those “dot-com” companies, but the market now is treating such money-losing names as EToys, TheStreet.com, Autoweb.com and Internet America, among others, as if their franchises are in serious jeopardy.
“We told you this was madness!” many Wall Street pros clucked last week, wagging their fingers at investors who hopped aboard the great momentum stock mania in January and February with little or no understanding of the businesses they were buying.
But plenty of the people chasing those individual stocks knew exactly what they were doing. They’re gamblers--not imbeciles. They took a risk, and if they were savvy traders, they may have made a mint in January and February. Those who stayed too long in now-deflating tech names, however, are paying the price. That’s the reality of the momentum game: easy come, easy go.
Still, the true short-term momentum players aren’t what’s worrying Wall Street now.
The most stunning piece of data last week was the report showing that a record $53.6 billion of net new money poured into stock mutual funds in February. And nearly three-quarters of that sum flowed into aggressive-growth stock funds, including technology-sector funds.
Many of those investors may well fancy themselves to be long-term in their orientation. Many probably waited while tech stocks continued to surge through the fourth quarter of last year and into the first two months of this year. “When these stocks pull back meaningfully, I’ll get in,” they probably figured.
But by February, with the tech sector only getting hotter by the day, the fear of being left behind must have become too much to bear--hence, the record inflow of dollars to the aggressive-growth stock funds that were the market’s darlings at the time.
Will this money stay put if the tech sector’s decline worsens in the weeks to come?
This is a very good time for everyone who owns technology stocks or aggressive-growth mutual funds to consider just how firm their commitments are to these investments. Because it appears that Wall Street is about to enter a piling-on phase--a sort of, “Who can say the most damning thing about tech?” period.
Last week, well-known market strategist Abby J. Cohen at Goldman, Sachs & Co. advised clients to pare back stock holdings in general, with an added reminder that tech stocks “are no longer undervalued.”
She was followed by Mark Mobius, the emerging-markets guru at Templeton mutual funds, who warned of an impending Internet stock crash worldwide.
On Thursday, PaineWebber strategist Edward Kerschner, another highly respected name, sent out a report subtitled “The Beginning of the End.” His central argument: The “new metrics” by which many investors have been valuing technology stocks are a sham--and the stocks are finally beginning to reflect that.
Cohen, Kerschner and others aren’t looking to discredit the tech-stock boom entirely, of course. But with many tech bulls now on the run, any doubts cast upon the sector can quickly become “substantial doubts,” whether warranted or not.
Are your seat belts fastened?
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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.
