New Tech Slide Testing Investors
The technology sector, already beset with overcapacity and anemic demand, faces a further threat from deteriorating investor psychology in the wake of the stock market’s latest slide, some Wall Street experts believe.
Investors who saw their major tech shares plunge to multiyear lows in the spring, then rebound, felt twice burned last week as some of the most widely held names tumbled to new lows.
Collapsing stock prices make it harder for tech companies to raise capital and to maintain morale among employees, many of whom consider stock options and discounted shares a major part of their compensation.
The latest tech-stock skid, which claimed several acknowledged leaders in their business niches, came amid more signs that the industry’s downturn in sales and earnings hasn’t reached bottom.
Stark evidence was provided by Sun Microsystems Inc.: Company executives said Wednesday that their confidence in earlier sales targets had evaporated. Analysts scurried to mark down their estimates for 2001 and 2002 sales and profits at Sun and its competitors and suppliers.
Sun’s shares fell as low as $10.40 in Nasdaq trading Thursday, crashing through the April low of $13.04 to the lowest price since December 1998. The stock edged up to close at $11.45 Friday, but still lost 23% for the week.
From its record high of $64.31 in 2000, Sun stock has fallen 82%. Losses of that magnitude, or worse, are typical across the tech sector.
The tech-dominated Nasdaq composite index closed Friday at 1,805.43, down 64% from its 2000 peak, though it remains 10% above its April low of 1,638.
“These stocks aren’t going to move materially higher until there’s some sense that the environment has turned around,” said Philip Orlando, chief investment officer at Value Line Investment Management.
Other tech notables hitting new multiyear lows last week included WorldCom Inc., Oracle Corp., Yahoo Inc., Global Crossing and JDS Uniphase Corp.
All five, like Sun, were cited by analysts last April as being in danger of falling below $10 a share. Global Crossing and JDS Uniphase since have dropped into single digits, while the others hover precariously two or three dollars above that line.
The $10 mark is of mainly psychological significance, but some money managers and individual investors tend to rule out single-digit stocks as too speculative. Moreover, most brokerages no longer consider a stock to be valid collateral for margin loans if it falls below $5.
Stock market “technicians”--Wall Street’s charts-and-graphs wizards--say major tech shares’ slide back to their spring lows doesn’t necessarily foretell more gloom. They say that a stock’s “retest” of previous lows can be a healthy first step before a rebound can ensue.
But if the retest “fails” and prices continue to fall, the effect on investor psychology can be devastating.
The loss of faith in once-popular stocks can cause them to lag behind the broad market long after the companies’ business fundamentals have begun improving, some analysts warn.
“When you start a slide like this, you can overshoot the other way just as you did on the way up,” said Arthur Micheletti, chief strategist at money management firm Bailard Biehl & Kaiser in San Mateo, Calif.
Another factor acting as a head wind against big tech stocks is that the companies’ earnings expectations are dropping as fast as or faster than the share prices, in many cases. The result is that the stocks’ valuations--price-to-earnings ratios, for example--remain high relative to the average stock.
“Even where they are, many of these stocks aren’t exactly cheap,” Micheletti said.
Shares of Sun Microsystems, for instance, now trade for 57 times the 20 cents a share analysts on average expect the company to earn in the fiscal year ending in June 2002. Even based on the average fiscal 2003 earnings estimate of 48 cents a share, the stock’s P/E is 24.
The average U.S. blue-chip stock, by contrast, is priced at about 19 times estimated 2002 earnings, and less than that based on expected 2003 earnings, assuming of course that the economy has recovered by then.
“Is Sun going to 15 times earnings?” Micheletti asked. “I don’t know, but it could happen.”
Even if the economy overall rebounds, there are good reasons technology companies--and technology stocks--could continue to lag behind, experts say.
Fiber-optic-equipment maker JDS Uniphase and competitor Corning Inc. typify the extreme overcapacity in some tech sectors, Value Line’s Orlando said, citing industry estimates that it could take 10 years to fully utilize the fiber that already has been installed.
The global tech-equipment binge sparked by worries about the year 2000 computer bug crammed several years’ worth of technology purchases into several months in 1999, he said. Many businesses see no need to boost tech spending any time soon.
Aside from fundamentals, major tech stocks could lag simply because--whether rational or not--investors often will shy from a sector that recently has caused them great pain, said Edward Riley Jr., chief investment strategist at State Street Global Advisors in Boston.
For example, biotechnology stocks rocketed in 1991 and 1992, then quickly collapsed. Many investors stayed away from the sector until 1999.
Japanese stocks offer the most dramatic example of what can happen when a hot bull market implodes. Japan’s Nikkei 225-share index peaked in 1989 at 38,915 and never again got close to that level. Last week, the index fell to 10,713, its lowest since 1984.
Things could get worse for U.S. tech stocks soon, if more companies warn about an earnings shortfall this quarter, Riley said.
Yet technology is “still one of the best secular areas for growth” that investors can find, if they can take a longer-term view, he said.
Riley recommended that investors stick with proven leaders with strong balance sheets and cash flow--companies such as Cisco Systems Inc. and Dell Computer Corp.--that have the “survivability” to get through even another year of misery.
