Patience May Be Virtue in Bargain Hunt

Finally, gravity proves it still applies in the stock market as well as in the real world.

With the continuing sell-off in technology stocks this week, and the strong possibility of more losses ahead, many investors find themselves in one of two camps--or perhaps straddling both:

* One camp is made up of investors who own many tech shares and are worried that their profits are going to evaporate--or that their losses will become extreme.

* The other camp is made up of those wondering when it’s time to buy plummeting tech stocks.

Clearly, with sellers in control so far, the first camp has more to worry about. Given the extraordinary valuations many tech issues had reached in the frenzied buying of the fourth quarter, it’s hardly surprising that so many investors would be rushing for the exits now, as a growing number of tech giants warn that their earnings growth won’t meet expectations.

If price-to-earnings ratios on these stocks were high before, they immediately get far higher for companies that suddenly announce earnings shortfalls--that is, until sellers massacre the stock.

How much worse can it get for the stocks? Through Thursday, names such as Yahoo, Qualcomm and CMGI were down only 20% to 25% from their recent peaks. Few Wall Street pros would be surprised if the shares fell as much as 40% to 50% from their peaks, if investor sentiment turns negative enough.

Consider: Wireless technology leader Qualcomm has fallen nearly $40 from Monday’s record close of $179.31. At Thursday’s $140.06 close, the stock was priced at about 140 times analysts’ consensus earnings-per-share estimate for ’00.

If the price fell by half from Monday’s peak, to about $90, the P/E ratio would still be about 90--quite generous even for a firm whose expected annual earnings growth rate over the next five years is 35% or so.

How drastically investors will re-price the tech stocks they fought so furiously to buy in December is as yet unclear. But a major problem for the stocks could be the very fact that so much of the money that jumped into the sector in November and December was probably “hot” money--investors looking for a trading opportunity, not a long-term holding.

By definition, hot money doesn’t stick around when trouble hits. That’s especially true when that money is borrowed.

Already, this week’s slump in tech stocks has caused a spike in margin calls at online brokerages as customers who borrowed to bet on the sector are being asked to put up more cash to compensate for the value of their sliding shares.

“Whenever the Nasdaq goes down 150 points, margin calls are going to go up,” said Dan Hubbard, a spokesman for Charles Schwab. “But they’re not at a level we view as significant or indicative of a trend.”

Patrick Di Chiro, a spokesman for E-Trade Group, said that after rising 50% on Tuesday, margin calls were up only about 5% on Wednesday, when tech stocks fell early in the day but partly recovered in the afternoon. Figures for Thursday were not available.

“Margin calls were definitely up, but customers were dealing with it in an appropriate way,” he said.

For tech bargain hunters, all of this suggests that patience may be a virtue right now.