After Many Give Up on Tech, It Stages a Revival

Collapsing technology shares caused agony for millions of investors over the last three years.

The stocks may be causing more of the same in 2003 -- but this time, it’s because they’re resurging while many skeptical investors watch from the sidelines.

The tech-dominated Nasdaq composite index eked out another gain on Monday, rising 1.16 points to 1,504.04 -- a 10 1/2-month high -- even as blue-chip indexes ended modestly lower.

The rebound in tech has been perhaps the biggest surprise on Wall Street this year. After many investors gave up hope that the sector could ever recover after three years of devastating losses, Nasdaq has advanced 12.6% since Jan. 1, more than double the 5.3% rise of the blue-chip Standard & Poor’s 500 index.

More striking have been gains in many individual tech issues, especially in the Internet industry, which paced both the tech-stock mania of the late 1990s and the sector’s bust since March 2000. Amazon.com Inc., for example, is up 58.6% this year. Yahoo Inc. has surged 53.1%.

Of course, most investors who bought tech during its heyday, and held on, still are deep underwater. The Nasdaq index is down 70.2% from its 2000 record high.

But for new buyers, the profits -- at least on paper -- have been plentiful in 2003.

The tech rally extends well beyond the Internet category. Software maker Adobe Systems Inc. is up 51.9% this year; wireless giant Nextel Communications Inc. is up 33.3%; semiconductor maker Broadcom Corp. has risen 25.7%.

At Schaeffer’s Investment Research in Cincinnati, founder Bernie Schaeffer told clients late last year that tech shares could be the market’s hottest story in 2003 -- even though he believes Wall Street overall remains in a long-term bear market.

Now, Schaeffer sees a “decent chance” that the Nasdaq index could rise to 2,000 before running into severe headwinds. That would be a 33% gain from Monday’s close.

Yet disbelief about the sustainability of the advance remains high.

“Until proven differently, this is one more abrupt bear-market rally,” said Russ Koesterich, domestic equity strategist at State Street Global Markets in Boston. “It’s playing to the script we saw in September 2001, last summer and again after the October lows. We’ve seen this movie several times in the last three years and we know how it ends.”

The S&P; 500 has risen 19.3% from its five-year low reached in October, while Nasdaq has soared 35% since then. Other rallies of the last three years have fizzled soon after reaching those levels of gain, Koesterich noted.

Tech’s fans say the latest buying wave is a sign that investors are recognizing the long-term value of many of the companies that have survived the brutal shakeout of the last three years. Tech, they say, still is the best American growth industry for the long haul.

In the Internet sector, it helps that savvy investors such as Barry Diller continue to find value -- as he apparently did Monday with LendingTree Inc.: Diller’s USA Interactive offered $21.13 a share for the company, whose stock was trading at $14.69. The shares had been at $9.20 in early March.

Individual investors, however, are just beginning to show more interest in mutual funds that favor tech shares, and even that interest is tentative, some fund companies say.

“I’m not sure the average investor realizes tech has been coming back,” said Steve Norwitz, spokesman for T. Rowe Price Group Inc. in Baltimore, whose tech-oriented funds have seen improving but modest cash inflows this year. “To the extent that people are aware, many see it as a ‘dead cat bounce’ off the levels of last fall.”

(The “dead cat” reference is an old Wall Street joke about dubious market rallies -- even a dead cat bounces a little when dropped from on high.)

Fundamentally, tech-sector bulls argue that the rebound in corporate earnings in recent quarters is setting the stage for a pickup in business capital spending on tech equipment, which in turn could fuel strong profit growth for tech firms.

The quick U.S. military success in Iraq could be another factor driving the rally, said Michael D. Cohen, director of research at Pacific American Securities, a San Diego-based brokerage firm that caters to institutional clients. “Now that people feel more optimistic, the risk of missing out on a rally is outweighing the downside risk of being exposed” to the market, he said.

Skeptics, however, say tech names are once again overpriced relative to their earnings potential, even if the economy is perking up. Although their earnings are on an upswing, Yahoo trades at 72 times this year’s expected per-share profit, and EBay Inc. and Amazon sport estimated price-to-earnings ratios of 64 and 63, respectively -- compared with 18 for the S&P; 500 overall.

“I think there are better ways to play an economic recovery,” said manager Bob Smith, who described his T. Rowe Price Growth Stock fund as “slightly underweight” in tech relative to its large-cap growth peers. He said he prefers financial, retail and media stocks for their balance of growth and value characteristics.

Some Wall Street pros say the tech rally has been powered in part by short-term traders hoping to make a quick score as other investors jump aboard.

“They trade with a two-month horizon,” Smith said. “That’s a dangerous game.”

The rally also is being propelled by portfolio managers who are worried about job preservation, Smith said.

“If you underperformed in the downturn, you almost have to outperform on the way up,” he said, “because that’s the story you told your clients: ‘We’re in growth and growth has gotten killed, but we’ll look great when it comes back.’ ”

Even some tech fund managers acknowledge that the sector still faces big challenges.

“Broadly defined, we’re neutral on tech, but there are pockets of opportunity on a stock-by-stock basis,” said Jonathan Cohen, manager of the Royce Technology Value fund. “The sector is still struggling with larger global issues” of current and long-term demand, he said.

Although many tech firms have fallen by the wayside since 2000, overcapacity continues to dog the industry, critics say.

“Simply put, there is still too much stuff and not enough demand,” Koesterich said.

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Tech stock P/Es: A sampling

Here is a look at how some tech stocks have fared this year, and the stocks’ price-to-earnings ratios based on analysts’ consensus estimates of 2003 and 2004 earnings per share.

*--* Monday YTD pctg Est. P/E: Est. P/E: Stock close change 2003 2004 Juniper Networks $11.95 +75.7% 153 80 Yahoo $25.03 +53.1 72 54 EBay $94.00 +38.6 64 46 Texas Instruments $19.49 +29.9 49 27 Broadcom $18.93 +25.7 50 33 Intel $19.02 +22.2 31 24 Cisco Systems $15.39 +17.5 27 25 IBM $86.52 +11.6 20 18 Dell Computer $29.50 +10.3 30 25 Microsoft $25.86 0.0 25 24

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Sources: Thomson Financial, Bloomberg News