Tech, Telecom Falling Out of Favor
Has the tech and telecom stock boom topped out?
Money managers around the world are looking to cut their investments in telecommunications and Internet stocks that have fueled the market rally of recent years, according to a survey by Merrill Lynch & Co. released Tuesday.
Almost three-quarters of the 251 fund managers surveyed March 3 to 8 said telecom and technology-related stocks are overvalued.
“Worryingly, most plan to cut their exposure over the coming year,” said Trevor Greetham, an investment strategist at Merrill who compiled the monthly report. A steep decline in tech names could cause the entire market to slide since these stocks have been responsible for most of the gains.
The Standard & Poor’s 500 index of blue-chip stocks rose $2 trillion in value last year, with 10 stocks accounting for 65% of the advance. All 10, except Wal-Mart Stores Inc. (ticker symbol: WMT), are technology-related companies.
Merrill analysts agree with fund managers in thinking tech and telecom stocks are poised to fall.
“To keep buying [them] you have to believe in both stronger [profit] growth and in lower inflation,” Greetham said. “We don’t.”
But some high-profile fund managers still say tech is the place to be.
Alberto Vilar, whose $820-million Amerindo Technology Fund more than tripled last year, said he has been buying Ariba Inc. (ARBA) and Commerce One Inc. (CMRC), both of which make software to process online orders; FreeMarkets Inc. (FMKT), which runs online auctions for industrial companies; and OnDisplay Inc. (ONDS), a maker of software that helps Web sites swap information over the Internet.
“All technology will converge to the Internet,” said Vilar, who expects the Net in the next five to seven years to drive “the biggest structural change in the U.S. economy” in the last half-century. Electronic commerce now makes up 2% to 3% of the U.S. economy, Vilar said, and that should rise to 20% to 25%.
Vilar said he expects Internet shares to slide further in coming weeks, and investors should use that as an opportunity to snap up some of their favorites.
Chris McHugh, manager of the Turner MidCap Growth Fund, also remains a tech bull. As the Nasdaq composite slid 2.8% on Monday--preceding Tuesday’s 4.1% drop--McHugh said he added to the fund’s technology holdings, although he declined to identify specific stocks.
Both fund managers have been betting recently on the business-to-business segment of electronic commerce. McHugh said he has bought shares of PurchasePro.com Inc. (PPRO), which lets companies buy and sell supplies online.
He said he looks for companies where analysts are raising their earnings estimates, profits meet or exceed those forecasts and the stock is in an up-trend.
The relatively high price-to-earnings and price-to-sales ratios on Internet stocks don’t deter McHugh or Vilar.
“This is business as usual to me, to see these companies at these valuations,” Vilar said. The previous generation of big winners, such as Microsoft Corp. (MSFT), Cisco Systems Inc. and Oracle Corp. (ORCL), never had low PE ratios relative to the overall market, he noted. “If you are an investor in emerging technology, you don’t use what made Warren Buffett rich.”
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Tech Correction Underway
Many technology and telecom shares have tumbled in recent sessions, and the declines for some already exceed 20% from their peaks. A sampling:
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Recent Tues. close Decline Stock (ticker symbol) peak and change from peak Ciena (CIEN) $189.00 $134.00, -$13.13 -29% QLogic (QLGC) 203.25 148.00, -21.63 -27 CMGI (CMGI) 163.50 123.88, -8.38 -24 VerticalNet (VERT) 296.75 230.00, -24.00 -22 Broadcom (BRCM) 249.81 200.94, -29.06 -20 Agilent (A) 162.00 130.00, -1.25 -20 Juniper Net. (JNPR) 301.25 245.56, -18.31 -18 Sun Microsys. (SUNW) 101.94 87.38, -3.50 -14 Apple (AAPL) 132.06 114.25, -7.06 -13 Motorola (MOT) 184.63 161.19, -6.31 -13 Nasdaq composite 5,048.62 4,706.63, -200.70 -7
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Sources: Reuters, Bloomberg News
