October 7, 2001
MARKET WATCH
In a Choppy Tech Sector, It May Be Too Soon to Cheer
By GRETCHEN MORGENSON
fter almost a month of melancholy and mourning, investors are understandably eager for happier news. And so it was perhaps predictable that buyers flooded into technology stocks last week, after Dell Computer (news/quote) and Cisco Systems (news/quote) confirmed that they were on track to meeting earnings forecasts made in sunny August.
But eagerness for even a smidgen of unbad news should not lure investors back into companies that still have some rough patches to ride through. Yes, an economic recovery lies ahead and, sure, the technology bear market may have nearly run its course. But it is by no means clear who the survivors will be in many parts of the industry.
"Any positive news is likely to trigger some rallies," said Jimmy C. Chang, chief technology strategist at the U.S. Trust (news/quote) unit of Charles Schwab (news/quote). "But it's going to be a very choppy phase. Given this environment, I'm going to wait for stocks to come to me."
Mr. Chang said one factor behind last week's run-up in technology stocks was hedge funds: There are so many dedicated to technology investing that the entire sector has become an area they jump in and out of, trying to eke out gains. "Tech has become a trading vehicle for them," he said, "making the stocks inherently more volatile."
But investors should not necessarily follow these traders' leads, and Mr. Chang gives several reasons why. First, he said, consumers of technology gear — both individuals and corporations — have not yet finished sorting out which companies are going to survive and which are not.
While increased government spending will help keep the economy from a free fall, Mr. Chang said that any recovery in technology must be led by burgeoning capital spending by corporations on these goods. If the government changes depreciation schedules for companies or creates new investment tax credits for technology equipment — as is now being considered — that will help stabilize the industry. But in the short term, sales will be stunted.
Get Stock Quotes
Look Up Symbols
Portfolio | Company Research
U.S. Markets | Int. Markets
Mutual Funds | Bank Rates
Commodities & Currencies
Click here to order Reprints or
Permissions of this Article
If it is tough to predict when sales of technology equipment will come back, it is downright impossible to estimate future profit margins of these companies. But because earnings will drive these stocks in the postbubble era, margins will be crucial. Buying these stocks now, when margins are an unknown, is to choose hope over experience.
"The biggest question for technology in general is, `What are the margins going to be going forward?' " Mr. Chang said. "On a price-to-sales basis, they're only O.K. if they can restore their margins. If not, there will be further pain in tech investing."
One area Mr. Chang would avoid is stocks of personal computer makers like Dell and Gateway. "As good as Dell is, they are fighting in a commodity business," he said. And excess capacity among telecommunications concerns means more of the brutal shakeout investors have experienced.
Leaders in an industry recovery, Mr. Chang said, will include software applications manufacturers like Siebel Systems (news/quote) and i2 Technologies (news/quote). "In the end, a recovery will come because of new software applications," he said. Mr. Chang also thinks that stocks in the beaten-down data storage area will come back when the economy does. |
