Investors No Longer Wince at Tech Shares -- Just Yawn
Five years to the day that the Nasdaq Stock Market peaked, technology-sector loathing is no longer in fashion on Wall Street.
It has been replaced by what some tech mutual fund managers say is even unkinder treatment: simple disregard by many investors.
Technology holds little cachet in a stock market where oil, real estate, copper and other hard assets have become the new darlings, laments Doug Foreman, a managing director and tech stock proponent at TCW Group Inc. in Los Angeles.
Yet investors who can look out one to two years -- instead of spending time kicking themselves over how much they lost in the tech crash -- will find no shortage of exciting companies in computer networking, electronic gaming and Internet commerce, to name a few niches, industry fans say.
David Ellison, a money manager at Friedman Billings Ramsey Group Inc. in Boston, sees this as a great time to be investing in solid tech companies that the market may be ignoring.
“It’s a better time to be investing in tech names than in residential real estate” and other hard assets, he says. “Three to four years ago was the time to be investing in oil.”
For now, however, those entreaties are falling on a lot of deaf ears. Foreman describes many big clients’ attitude toward his tech investment ideas over the last year as one of “benign indifference.”
That shows in the recent performance of the Nasdaq composite index, which is dominated by the tech giants that call that market home: It has fallen 5.3% since Dec. 31, including Wednesday’s loss of 12.26 points, or 0.6%, to 2,061.29, amid a broad market slump.
Despite more signs that the global economy is revving up -- good news for the tech industry’s sales and earnings outlook -- the Nasdaq index is sharply lagging behind other major stock gauges. The Dow Jones industrial average, which slid 107 points, or 1%, to 10,805.62 on Wednesday, still is up 0.2% year to date.
Five years ago, it was the Dow that was a relative wallflower, as the craze for dot-com stocks sucked in millions of investors.
On March 10, 2000, the Nasdaq index zoomed to its all-time closing high of 5,048.62, in the last gasp of the tech stock mania that built up slowly in the late 1990s before mushrooming in 1999 -- when the Nasdaq index rocketed 86%.
The Internet was changing everything -- including, it seemed, how high stocks could go before they became absurdly overvalued.
As it turned out, 5,000 on Nasdaq was an absurd level. As interest rates rose in 2000 and the global economy slowed, investors began to realize how little in real sales and earnings backed up many tech companies’ inflated share prices.
The buying panic of late 1999 and early 2000 became a selling panic. By the end of 2000 the Nasdaq index had been cut in half from its peak. It would continue plummeting in 2001 and 2002, reaching its bear-market low on Oct. 9, 2002, at 1,114.11. At that point, the index had lost a stunning 78% from its peak.
With the broad market’s rebound in 2003 and 2004, many tech stocks revived as well. But most remain far off their highs. At Wednesday’s closing level, the Nasdaq index was down 59% from its zenith.
To be sure, star stocks have emerged from the tech wreck even as many devastated investors have turned away.
Internet search engine Google Inc. became wildly popular in its Wall Street debut last fall. Investors bid it up from the offering price of $85 in August to a peak of $210 in early February. Google closed at $181.35 on Wednesday.
Shares of Apple Computer Inc. also roared last year amid the success of the company’s iPod digital music player. Apple stock zoomed 201% in 2004 and is up 22% this year, to $39.35.
With some smaller tech stocks, the prices of 2000 now look like bargains.
Avid Technology Inc., which sells digital editing systems to Hollywood, topped out at $24.50 in 2000. After struggling to regain their momentum in 2001 and 2002, the shares have been on a tear since. The stock hit a record closing high of $67.68 on Tuesday before easing to $66.47 on Wednesday.
Since 2000 “the tech story has been more the small and mid-caps than the big companies,” said Chris McHugh, a senior fund manager at Turner Investment Partners in Berwyn, Pa.
Indeed, some tech stock fans say a major challenge in getting investors interested in the industry again is that the most visible and best-known companies -- for example, Cisco Systems Inc. and Intel Corp. -- are among the biggest laggards in the market.
Shares of Cisco, the dominant maker of computer networking gear, slumped 20% last year, even as the broader market rallied. So far this year the stock is down 4% to $18.53.
Intel is up 6% this year, to $24.84, but that follows a 27% plunge last year.
As the biggest tech names have languished, they have further depressed investor sentiment toward the industry as a whole, some analysts say.
That’s misguided, McHugh and others contend. His firm has cut back on its Cisco holdings this year because of concern that the company will continue to struggle to get back on a solid growth track, McHugh said.
But growth prospects of many smaller tech companies are robust, he said. F5 Networks Inc., for example, is “far ahead” of Cisco in networking equipment for certain Internet traffic management applications, McHugh said. F5’s shares are up 16% this year after soaring 94% last year.
Some investors who have shied away from tech since 2000 say the stocks still are too richly priced relative to underlying earnings. Price-to-earnings ratios mostly are well below the mania peaks of 2000, but Google shares, for example, are valued at 46 times estimated 2005 earnings per share. That compares with a P/E of 17 for the average blue-chip stock.
Shares of some of the biggest tech names, however, are priced just slightly above the average blue-chip. Microsoft Corp.’s P/E now is 18 based on analysts’ average earnings estimate for the fiscal year ending in June 2006.
The tech sector overall “isn’t cheap, but it certainly isn’t overpriced,” TCW’s Foreman says.
Walter Price, manager of the Pimco RCM Global Tech fund in San Francisco, says investors may be underestimating the earnings growth ahead for tech as business capital spending ramps up, particularly to support Internet commerce.
Yet the fact that many investors are ignoring tech actually gives him comfort that bargains abound, Price says.
“When it’s time to be interested in tech,” he said, “no one is.”
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A sampling of tech shares
Some smaller tech stocks have fared well since the market peak in 2000, but many of the biggest names have fared worse than the Nasdaq composite index.
*--* Price-to- earnings ratio on estimated 2000 Wed. Pctg. 2005 earnings Company high close change per share Avid Technology $24.50 $66.47 +171% 25 Autodesk $13.72 $30.16 +120% 28 Symantec $10.10 $21.17 +110% 21 Microsoft $59.96 $25.31 -58% 18* Qualcomm $100.00 $36.74 -63% 31 Intel $75.81 $24.84 -67% 20 Oracle $46.46 $13.35 -71% 18* Yahoo $125.03 $32.32 -74% 62 Cisco Systems $82.00 $18.53 -77% 18* Broadcom $274.75 $31.86 -88% 30 Nasdaq composite 5,048.62 2,061.29 -59% NA S&P; 500 1,527.46 1,207.01 -21% 17
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*P/Es based on estimated earnings for fiscal years ending in mid-2006.
Sources: Thomson First Call, Bloomberg News
