Tech Shares Hammered Again
Investors again fled technology stocks in droves on Thursday, and a late earnings warning from telecom-equipment giant Lucent Technologies threatens another blood bath in the tech sector today.
But instead of taking down the entire market, the sell-off in tech shares this week--after their tremendous gains in 1999--is so far benefiting many other stocks, from utilities to energy issues to paper companies.
Indeed, while the Nasdaq composite index plummeted 150.41 points, or 3.9%, to close at 3,727.13 on Thursday, the Dow Jones industrial average surged 130.61 points, or 1.2%, to 11,253.26.
Rising stocks outnumbered losers by nearly 2 to 1 on the New York Stock Exchange. And on the Nasdaq market, despite the declines in many tech issues, falling stocks had only a slight edge over rising issues.
The heaviest selling has targeted the tech and Internet issues that led last year’s 86% advance in the Nasdaq composite index.
But what began as mere profit-taking early in the week has turned more serious as some key tech companies, including BMC Software, Amazon.com, Gateway and now Lucent, have in recent days warned that fourth-quarter earnings will fall short of Wall Street’s high expectations.
Lucent’s warning is likely to further rattle battered tech stocks this morning, money managers said, because a growing number of investors already were looking for reasons to unload shares amid this week’s sharp slide.
What’s more, “When Amazon announced (weaker than expected results), it wasn’t such a big deal because they’ve done it before,” said Christopher Low, chief economist at First Tennessee Capital Markets. But in the case of Lucent, he said, “This comes completely from left field.”
“It’ll hurt,” agreed Roger McNamee, general partner at Integral Capital Partners, a technology investment firm in Menlo Park, Calif.
But, he added, Lucent’s problems are company-specific and unlikely to dent investors’ long-term enthusiasm for other firms--such as Cisco Systems--involved in the building out of broadband services.
“A lot of people own this stock [Lucent] and are likely to draw conclusions [about the industry overall] that are completely inappropriate,” McNamee said. “This is not an issue for Cisco.”
Though it was Lucent’s first negative “pre-announcement” since being spun off from AT&T; in 1996, Lucent’s numbers were weak last year, McNamee said.
“There have been signs for some period of time that Lucent’s core operations were under pressure,” he said. “They have huge seasonality to their traditional business. Last year’s numbers were not quite set, but the market was quick to forgive them.”
Some investors were willing to give Lucent the benefit of the doubt that its woes will be short-lived.
“A company can pre-announce and miss the mark in any given quarter,” said Kevin Landis, manager of the Firsthand Technology Leaders fund, which owns Lucent shares. “It doesn’t change who they are or the long-term prospects for their markets.”
Meanwhile, the tech-stock pullback so far has been only good news for many non-tech shares, as profit-takers have looked for other sectors to buy, and as investors who might have bought tech stocks are instead playing it safer, at least for the time being.
Big gainers on Thursday included chemical giant DuPont, up $3.56 to $71.50; 3M, up $7.50 to $100; heavy machinery maker Caterpillar, up $2.50 to $51.63; retailer Gap, up $4.69 to $44.44; and Johnson & Johnson, up $2.81 to $92.56.
The Standard & Poor’s 500 index, like the Dow, rose on Thursday, inching up 0.1%. The NYSE composite index gained 1%. The S&P; small-cap stock index closed lower, but its 0.6% loss was modest compared with Nasdaq’s decline.
The broader market’s relative strength, and a decline in bond yields, surprised some analysts, given that the government today will report December employment data. A strong report could renew fears of more interest rate hikes by the Federal Reserve.
In the bond market, the 30-year Treasury yield eased to 6.56% from 6.62% on Wednesday.
On Nasdaq, where trading volume remained extremely heavy, the big losers included Yahoo, down $42.31 to $368.19; Apple, down $9 to $95; and Akamai Technologies, down $47.38 to $236.13.
Richard McCabe, Merrill Lynch’s chief market analyst, said he thinks this week’s slump in tech shares marks “a real turn” in momentum and psychology.
By traditional standards, the economic climate over the last year has been ideal for basic-industry sectors, McCabe noted, but many of those shares have failed to thrive because tech got all the attention. Now, with some of the enthusiasm draining away from the tech sector, “We might just be seeing a flight to some of the less-exploited stocks.”
For some investors, the operative emotion Thursday was schadenfreude--or delight in the suffering of others--as Wall Streeters who have been wagging their fingers at the surging Internet sector thought they might finally be seeing the bubble burst.
“It’s more a feeling of relief from people who’ve been chasing these stocks without even liking them,” said First Tennessee’s Low.
As companies like Yahoo get added to major stock indexes, Low noted, money managers often are forced to add them to their portfolios whether or not they consider them wildly overpriced.
Nevertheless, Low expects the tech downturn to be fairly short-lived. Once the Fed gets its anticipated rate hikes out of the way and some of the steam has been bled out of the sector, tech shares most likely will resume their climb this year, he said.
But in the meantime, things seem likely to get uglier.
Market Roundup, C8
