Nasdaq Gains for This Year Nearly Gone

A fresh sell-off in technology stocks on Monday left the Nasdaq composite index barely positive for the year, another sign that risk is again becoming a four-letter word on Wall Street.

Nasdaq dropped 30.41 points, or 1.5%, to 2,007.52, cutting its year-to-date gain to 0.2%, as investors continued to pull away from many of the tech shares that had led last year’s powerful market rebound.

By contrast, the blue-chip Dow Jones industrial average slipped a modest 9.41 points, or 0.1%, to 10,609.62, and still is up 1.5% since the start of the year.

The trends in two well-known stocks illustrate how many investors’ preferences have shifted in recent weeks: Computer networker Cisco Systems Inc. fell 44 cents to $22.75 on Monday and is down 22% since mid-January, while fast-food giant McDonald’s Corp. rallied 61 cents to $27.77, its highest level in more than a year.

“It looks like a lot of money is waking up and heading for the hills in the overpriced tech sector,” said Bob Howard, who writes the Positive Patterns investment newsletter from Springfield, Mo.

Analysts who are bearish on tech stocks contend that the shares rose too far, too fast last year and in the first half of January, lifting prices to excessive levels relative to the companies’ underlying earnings potential. Some pros warned that investors were in danger or reprising the tech-sector bubble of 2000.

Others say that’s an exaggeration, and that tech shares have rebounded in line with a sharp turnaround in the sector’s fundamentals, as the economy has improved. The recent pullback in the stocks is just a short-term bout of profit taking, many tech fans say.

In any case, the losses have become significant for some investors who waited until January to jump aboard the tech bandwagon.

Semiconductor maker International Rectifier slumped $1.82 to $44.09 on Monday, and is down 19% since Jan. 16. Internet portal Yahoo lost $1.60 to $44.91 on Monday and is down nearly 10% since Jan. 12.

Even at Monday’s reduced price, International Rectifier shares were trading at 29 times analysts’ average estimate of the company’s earnings per share in the fiscal year that will end June 30. Yahoo’s stock was trading at 85 times its estimated 2004 earnings per share.

The average blue-chip stock, by comparison, is priced at about 19 times estimated 2004 profit, according to earnings-tracker Zacks Investment Research in Chicago.

The higher a stock’s price-to-earnings ratio, or P/E, the greater the risk that the price could plunge if earnings fall short. Lofty P/Es are driving some investors out of tech shares and into non-tech issues that are considered more reasonably priced, analysts say.

“At the margin it seems investors want to become more discriminating in what they own,” said Jack Caffrey, investment strategist at J.P. Morgan Private Bank in New York.

McDonald’s, for example, has a P/E of 17 based on analysts’ average estimate of $1.60 a share for 2004 earnings.

Another blue-chip stock rising to a 52-week high Monday was Altria Group, parent of Philip Morris. The shares jumped $1.28 to $56.63. The stock’s P/E is 12 based on estimated 2004 earnings per share.

Many Wall Street pros predicted at the start of the year that investors would begin to steer away from last year’s hot sectors and hunt for underappreciated stocks. But some figured the shift might not begin until about mid-2004 because tech stocks, in particular, had such strong momentum in the first few weeks of January, after Nasdaq zoomed 50% last year.

Jason Trennert, investment strategist at ISI Group in New York, said the market’s tone became less bubbly after the Federal Reserve on Jan. 28 appeared to hint that it might tighten credit sooner rather than later this year.

Rising interest rates typically reduce investors’ willingness to pay high prices for stocks relative to earnings.

“I think you can trace all of this back to when the Fed changed its language” about rates, Trennert said. “It changed the risk appetite in the market.”

There are other signs that investors are becoming more cautious. An index of investor optimism compiled monthly by brokerage UBS and the Gallup Organization fell this month after reaching a 22-month high in January, UBS said.

And profit taking hit more than just tech names Monday. Losers outnumbered winners by about 2 to 1 on the New York Stock Exchange and Nasdaq.

So far, however, the tech sector appears to be the main target for investors who have decided to take some money off the table.

Stocks of smaller companies, which like tech shares had been red hot last year, haven’t pulled back much.

Standard & Poor’s index of 600 smaller shares slid 3.66 points, or 1.3%, to 276.10 on Monday, a bigger drop than the blue-chip S&P; 500 index’s loss of 3.12 points, or 0.3%, to 1,140.99.

Yet the S&P; small-stock index is off 3.7% since it closed at a record high on Feb. 11. The Nasdaq index, by contrast, is down 6.8% from its 31-month high reached Jan. 26.

Some Wall Street pros say they doubt that the market is on the cusp of a major decline, because investors for the most part continue to bet on a strong economy and healthy corporate earnings this year.

That faith helped boost some heavy-industry stocks on Monday, including Caterpillar, up 40 cents to $77.22, and Alcoa, up 35 cents to $37.18.

But Brett Gallagher, head of U.S. equities at Bank Julius Baer in New York, said the slide in tech issues “clearly is a mini-version of what we might see” later in the year if the sector fails to pull back meaningfully soon.

In other markets Monday, Treasury bond yields fell as stocks lost ground. The 10-year T-note ended at 4.04%, down from 4.09% on Friday.