With Tech So Far Down, Is It Time to Step In?

Many technology stocks are selling at their lowest prices in a year, and the sector is the market’s worst performer by far in 2004.

And, as usual, when share prices are in a steep slide, investors overall are leery of stepping up to buy them.

Could they be missing a big opportunity?

That’s a question that is looming larger over Wall Street after a week of mixed signals from major tech firms.

Computer networking giant Cisco Systems Inc. on Tuesday warned that it expected sales growth to slow in the near term because corporate customers were more cautious about the economy.

Also this week, National Semiconductor Corp. and Hewlett-Packard Co. gave disappointing assessments of their prospects in the current quarter.

But personal computer leader Dell Inc. on Thursday painted a brighter outlook. And IBM Corp. this week said it boosted its hiring plans.

The tech-heavy Nasdaq composite stock index, which Thursday fell to its lowest level in 51 weeks, managed to end the week with a small gain Friday, rising 4.73 points to 1,757.22. It is down 18.4% from the 2 1/2 -year high it reached in January.

Some veteran money managers say that, unless the economy is falling off a cliff, investors may regret not rooting around for bargains in the tech sector at these prices.

“Sentiment is abysmal and people are giving up,” said Jim Oelschlager, head of Akron, Ohio-based Oak Associates, a money manager heavy in tech issues. “We all know this is how it is at the bottom.”

The price-to-earnings ratios of some major tech stocks, based on 2004 estimated earnings per share, have fallen to the upper teens or low 20s, much closer to the P/E of the average blue-chip stock (now 17) than was the case at the start of the year.

In general, a lower P/E can mean a bigger bargain -- or at least lower risk than when P/Es are high.

But many market pros remain wary of tech shares. They say investors still are in the process of lowering their expectations for sales and earnings growth in the sector, and that that could mean the stocks have further to fall.

Tobias Levkovich, equity strategist at Citigroup Global Markets in New York, said the profit warnings from a host of tech companies in recent weeks were proof that the industry wouldn’t produce the recovery this year and in 2005 that Wall Street had expected.

Investors were looking for a “supercharged” recovery in tech spending, Levkovich said. “But it’s just not there.” The economy, he said, will at best produce “just a normal capital spending cycle” for tech equipment.

As that view grows more widespread, analysts are likely to continue reducing earnings estimates for tech companies, said Richard Bernstein, chief U.S. market strategist for Merrill Lynch & Co. in New York.

And tech stocks, he said, “are among the worst-performing groups when the profit cycle decelerates,” because investors’ disappointment becomes acute.

One sign that the stocks might be bottoming would be if traditional “value” investors were stepping into the breach. Yet many of them echo Henry Berghoef, research chief at Chicago-based Harris Associates, a well-known value-oriented money manager: “They don’t look all that attractive to us,” he said of tech shares.

Bullish investors like Oelschlager, however, say this is the time when long-term investors should be asking, “Where are these stocks going to be in one or two years?” With that time horizon, “I think buyers are going to look a lot better than sellers.”

Other money managers agree, at least in principle, that bargains might be had now.

Hewlett-Packard, for example, “doesn’t look broken, but it’s priced as if it’s broken,” said Craig Braemer, regional director of investments at Highmark Capital Management in San Francisco. “We see some value there, although we do have some concerns about the company’s long-term strategy.”

Bob Streed, manager of the Northern Select Equity fund in Chicago, said he had been anticipating that profit expectations for the tech sector were too high, and would fall. He said he worried that many other investors were just waking up to the probability of slower growth.

“I’m not that concerned about the fundamentals” now, Streed said. But “I’m concerned about the stocks, because other people who own a lot of technology are going to be selling.”

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Sector in decline

HereÕs how a number of major tech stocks have fallen this year, along with the stocksÕ current price-to-earnings ratios (P/Es) based on analystsÕ consensus estimates of 2004 earnings per share.

2004 Fri Decline P/E base on Stock high close from high est. 2004 EPS Yahoo $36.40 $27.49 Ð24.5% 83 Nextel Commun. 29.18 21.50 Ð26.3 11 Motorola 20.72 14.21 Ð31.4 18 Applied Matls 24.63 15.64 Ð36.5 18 HewlettÐPackard 26.12 16.50 Ð36.8 15 Intel 34.24 21.56 Ð37.0 18 Broadcom 46.60 28.70 Ð38.4 21 Cisco Systems 29.13 17.86 Ð38.7 29* Sybase 22.66 12.80 Ð43.5 15 Ask Jeeves 44.05 23.98 Ð45.6 23 S&P; 500 1,157.76 1,064.80 Ð8.0 17 Nasdaq comp 2,153.83 1,757.22 Ð18.4 na

na Ñ not available * based on actual earnings in the fiscal year ended July 31 Sources: Times research, Bloomberg News, Thomson First Call