News from WSJ, the Wall Street Journal -- October 31, 1997
Heard on the Street:
Tech Stocks
Appear to Lead Market Moves
----
By E.S. Browning and Suzanne McGee
Staff Reporters of The Wall Street Journal
As the U.S. stock market gyrates, some key technology
stocks have at times emerged as bellwethers for the market's
action.
When the Dow Jones Industrial Average opened down
about 100 points yesterday morning, one key focus of
traders' concern was Dell Computer, which had fallen as
much as 6 3/4 points in response to a downgrade from an
analyst at BT Alex. Brown.
As Dell recovered much of the lost ground by noon, thanks
partly to an upgrade from Salomon Brothers, so the market
moved into positive territory. And when the market dropped
late in the day, Dell ended the day down 5 1/2 to 78.
Technology producers dominated yesterday's most actively
traded stocks, accounting for eight of the top 10 on the
Nasdaq Stock Market and five of the top 10 on the New
York Stock Exchange -- all to the downside.
Dell finished the day as the second most heavily traded
Nasdaq issue at 26 million shares. Compaq Computer,
which lost 2 3/16 to close at 61 1/4, was the Big Board's
second most active with composite volume of 18.7 million.
The Dow Jones Industrial Average finished down 125 at
7381.67.
"Technology can take a lot of credit" for the late-afternoon
stock slide, says Jon Olesky, head of listed trading at
Morgan Stanley Dean Witter. "If there was a negative theme
in the market all day, it was technology stocks, right from
the opening bell."
Not only do technology companies produce a lot of their
components in Asia, whose markets' upheaval rocked the
entire U.S. market this week, they also have been recording
some of their fastest sales growth there -- in gear ranging
from cell phones to semiconductors to personal computers.
Dell, whose stock price has more than tripled this year
despite its decline, and Compaq, whose price has more than
doubled, have been two of the market's and the technology
group's leaders. Analysts generally had been standing behind
them despite yesterday's downgrade by Philip Rueppel of
BT Alex. Brown, who moved them from a strong buy to a
simple buy.
Mr. Rueppel said a slowdown in fast-growing Asian sales,
downward pressure on product prices and more-skeptical
investor sentiment now could hold the stocks back. Given
the uncertainty and the big profits many investors already
have in the stocks, some have decided to sell now, take their
profits, and worry later.
"All of this won't be sorted out 'til next year," explains Jon
Hickman, a portfolio manager at Wells Capital
Management, the asset-management arm of Wells Fargo
Bank. "And that's what's causing some of the uncertainty
here. That led to the sell-off."
Mr. Hickman, who specializes in fast-growing stocks, is one
of the technology bulls; he was buying Dell as it fell. But
Dell also is one of the companies most heavily targeted by
short-sellers, who borrow stock, sell it, and then hope it will
fall so they can buy it back at a profit.
Around lunchtime Wednesday, says Michael Driscoll, a
block trader at Hambrecht & Quist, clients began calling
and asking for details on a supposed H&Q decision to cut
its Dell rating -- a cut that its analysts hadn't made. "There
was obviously some rumor-spreading going on out there,
people with an interest in seeing Dell go down trying to
give folks the idea we'd cut our rating," he said.
Some investors say the BT Alex. Brown downgrade was
important. "This to me is the first significant downgrade,"
says Seth Tobias, a partner in Circle T. Partners LP, a New
York hedge fund. He says the Asian problems come on top
of worries that products like the $1,000 computer could
drive down prices.
Dell spokesman T.R. Reid says Dell's largest Pacific-basin
operations are in Japan, China, Korea and Australia,
countries less affected by the currency trouble. "People need
to be careful about blanket assumptions about Asia," he
adds. "We remain optimistic."
But while Japan and the Asia-Pacific region represented just
6% of Dell's $7.6 billion in revenue for the year through
Feb. 2, they showed huge growth. Unit shipments to Japan
grew 67%, and by 93% in other Asia-Pacific countries,
including China, Korea, Australia and Southeast Asia.
During a meeting with analysts in September, Chief
Executive Michael Dell said the region, particularly China,
presented the biggest growth opportunity for the next four
years.
A variety of tech stocks have suffered lately. Intel, Nasdaq's
most active stock yesterday, fell 4 1/2 to 75 3/4. John
Geraghty, semiconductor analyst at Credit Suisse First
Boston, notes the fortunes of the world's leading producer
of microprocessors are naturally tied to those of
personal-computer makers.
Texas Instruments and Micron Technology, leading makers
of memory chips, also fell. Investors fear competing Asian
producers could cut prices of memory chips to try to build
exports as their sales weaken at home.
Semiconductor-equipment makers such as Applied Materials
also were hit by fears about their Asian sales.
Mr. Geraghty said investors might be erring by viewing
Texas Instruments as a commodity producer of memories,
since it has become a major supplier of more sophisticated
devices, such as chips that turn analog messages into digital.
One issue is the high valuations that some of the stocks have
attained. Dell, for example, trades at 40 times earnings for
the past 12 months, while Compaq fetches about 28 times
earnings, compared with about 20 for the overall market.
The high prices are based on Dell's per-share earnings
growing more than 35% next year and Compaq's more than
25%. If Dell delivers, it would trade at only about 30 times
1998 earnings -- high, but not outrageous for torrid growth.
Philip Schettewi, who manages about $1 billion in large-cap
stocks for Loomis-Sayles, says the high valuations are
keeping him away from both Dell and Compaq. He prefers
Gateway 2000, which he thinks soon will overcome
inventory problems that have hurt its stock.
---
Evan Ramstad contributed to this column.
---
High-Tech Tremors
Here's how far high-tech stocks that studded the most-active
lists yesterday have fallen since their most recent peaks this
year.
DATE OF % DECLINE
COMPANY PEAK FROM PEAK
Cisco Systems Oct. 21 -5.2%
Microsoft July 17 -14
Oracle Aug. 19 -18
Compaq Computer Sept. 22 -22
Dell Computer Oct. 15 -24
Intel Aug. 20 -25
3Com July 16 -31
Sun Microsystems Aug. 20 -38
Applied Materials Aug. 20 -41
Data General Aug. 28 -49
FREER TRADING: Goldman, Sachs relaxed its trading
restrictions for its employees amid this week's market rout.
Goldman's employees typically have to hold on to stocks,
bonds and other financial instruments they buy for 30 days.
But when stocks started plunging Monday, Goldman
officials loosened the restrictions to allow employees to sell
stocks and bonds they had purchased before Monday.
The firm didn't want its employees to be put at a
disadvantage by a policy that was designed both to
discourage short-term speculation and to deter insider
trading and stock manipulation. The shift was first reported
yesterday by The Street.com, an on-line news service.
While securities firms must have written procedures to deter
insider trading, the government doesn't specify policies for
firms. Regulators aren't likely to be alarmed here because
Goldman can still monitor the trading; employees must
conduct all their trading through the firm.
-- Anita Raghavan
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