Wall St. Analysts Conflicted Over Tech Sector Surge

Long-depressed technology stocks have been the surprise market leaders this year. And as has been true for every tech-sector rally of the last three years, there’s a heated debate on Wall Street over whether the gains can last.

Subodh Kumar, market strategist at CIBC World Markets in New York, said growth-oriented investors should be encouraged to see the Nasdaq market showing strength.

“The tech stocks are bottoming out faster than the rest of the market,” he said. “Restructuring in the technology industry has been extensive, and now we’re seeing signs that it’s paying off for the stronger companies.”

Indeed, the Nasdaq 100 index, composed of some of the nation’s best-known tech companies including Microsoft Corp., Cisco Systems Inc. and Intel Corp., is up 3.2% so far this year, while the blue-chip Standard & Poor’s 500 is down 3.6%.

But Laura Conigliaro, a well-known computer hardware analyst at Goldman Sachs & Co. in New York, is warning clients against over-optimism.

Tech stocks may fall back into line with the market before they begin to benefit from any rise in capital spending that follows a U.S.-led attack on Iraq, she wrote in a report to clients last week.

Some others agree. “Tech stocks are ahead of the fundamentals,” said Walter Casey, an analyst at Banc One Investment Advisors, which oversees $149 billion. “And some of the worst stocks are up the most.”

Such severely depressed issues as Corning Inc., Lucent Technologies Inc. and EMC Corp. are among the best performers in the S&P; 500 this year.

Casey, who will attend Goldman’s Technology Investment Symposium this week in La Quinta, Calif., said Conigliaro’s research gained credibility in 2000 when she and a colleague, Richard Sherlund, were among the first analysts to predict a prolonged slowdown in computer-related spending.

The latest warning from Conigliaro, who covers companies such as IBM Corp. and Hewlett-Packard Co., contrasts with fresh optimism at Merrill Lynch & Co. and Morgan Stanley about the semiconductor sector.

Merrill’s Joseph Osha last week said shares of chip makers, such as Intel, are inexpensive. Morgan Stanley’s Mark Edelstone said semiconductor suppliers will benefit from new products, cost cuts and increased spending on computers and networking gear.

Some institutional investors say it’s smarter to be buying tech stocks then selling them, after the industry’s depression of the last three years.

“I don’t see a catalyst for a big sell-off in tech because I don’t see [customer demand] deteriorating from here. Things are starting to stabilize,” said Shawn Campbell, an analyst at Northern Trust Corp., which oversees about $293 billion.

Benjamin Pace, who helps manage about $8 billion at Deutsche Bank Private Wealth Management, said investors’ confidence about a rebound in capital spending will keep them from dumping tech shares.

But Conigliaro warned that many institutional investors may already have added to their stakes in tech companies in recent months. That could mean there would be a dearth of tech buyers if an unexpected economic or political shock -- a U.S.-Iraq war going badly for the United States, for example -- slams the market overall.

“If these assumptions are valid, then this could pose yet another problem for tech as investors may be less inclined to increase tech weightings in portfolios which are already flush,” she said in her report.

“Although investors will need to position for a likely wartime rally at some point once the conflict appears to be winding down, getting involved too early risks joining the sell-off,” she said.