From the DELL Thread and Barron's Online .......................................................
March 2, 1999
Tech Managers Say It's Buying Time Again
By Carolyn Whelan
After nearly doubling from their lows last October to their record highs in January,
technology stocks like Intel, Dell Computer and Compaq Computer have sold off big time in
recent weeks.
The reason? Worries, worries, worries -- that sales of personal computers are weaker than
expected; that PC prices are dropping, and that the coming of the Year 2000 will slow
demand across the board. A few wags even suggest that the age of growth in PC sales
may be coming to an end.
That's prompting some technology fund managers to respond: "Make my day!"
They say we've heard all this negative talk before -- usually in the first quarter of the year --
and that business fundamentals in the sector remain sound. Technology stocks, they point
out, often have their weakest period in the winter and early spring, but then rally -- as they
did in 1997.
"What I love about this is that there's always overreaction," says Bill Schaff, portfolio
manager of the Information Tech 100 Fund. "You can take advantage if you ride out the
noise."
"[It's] much more seasonal than fundamental," agrees Mark Herskovitz, a manager of the
Dreyfus Technology Fund. "I can't get that excited -- every time, it's like the stocks are
going to zero." He says the recent bad news in the sector -- along with high valuations --
created "an excuse to take some profits."
But, says Chip Morris, who manages T. Rowe Price's Science and Technology Fund,
"There's no reason to panic: A 10-20% pullback is pretty much par for the course and goes
hand in hand with the volatility of the sector."
And indeed, the world probably isn't coming to an end. PC sales may even pick up in
March, and they should remain steady throughout the year--albeit not as strong as they
were initially expected to be.
San Jose, CA-based Dataquest, which is affiliated with Gartner Group, predicts a healthy
14% increase in unit PC shipments worldwide, only slightly slower growth than last year's
15.5%. Plus, Asia seems to be bouncing back, and once the Y2K cloud lifts, some
analysts expect PC sales to rebound.
Also, the first quarter is always slow for computer companies. After stellar sales of PCs
over the holidays, buyers often hold out for price cuts on machines using older processors,
or they'll pay up for the latest chip -- in this case, Intel's Pentium III.
That's a buy signal for some fund managers. "When pricing goes down and fundamentals
remain the same, it's a good time to step in," says Herskovitz of Dreyfus.
"You don't often get a chance to get a large-cap [tech stock] at a discount to its growth
rate," adds analyst Robert Cihra of ING Barings. "We think it's a good buying opportunity."
Herskovitz likes Intel and Dell, which at 109 13/16 and 81 7/16 are nearly 25% off their
52-week highs. Schaff finds Intel attractive, too, even though it's losing market share at the
low end to Advanced Micro Devices. "Any time you can buy Intel on a corrective move, it's
smart in the long term," he maintains.
Intel does look reasonably priced right now. Its 23x P/E for 1999 based on estimated
earnings of $4.70 a share (according to First Call) is at a nice discount to its 32% growth
rate for 1999. And its projected multiple of 21x earnings for 2000 is about in line with its
long-term growth rate of 20%. Dell, on the other hand, still trades at a premium (52x
estimated 1999 earnings, compared with 35% projected long-term annual earnings growth).
But Herskovitz is staying away from secondary companies. "If everything's going to get
nailed, why take the additional risk?," he says.
Likewise, Bill Schaff's going straight for the big blue chips. "It's not rocket science," he
explains. "As these sectors get hit, I try to focus on the leaders and buy them at 40% [off]."
His favorite? "I'm definitely adding to Compaq at 33" says Schaff, "The business model,
growth and dynamics haven't changed." And at current prices, the shares are certainly a lot
cheaper than they were. Compaq stock is more than a third off its 52-week high of 49 1/4,
and with a P/E of 18x 1999 estimated earnings, it's trading at a discount to both its 28%
estimated growth rate for 2000 and its 20% projected long-term annual earnings growth.
Cihra's also bullish on Compaq. "Its stock [was] selling at the same price at this time last
year," he says. "But the company's in much better shape than it was then."
Lou Mazzucchelli, an analyst with Gerard Klauer & Mattison, likes Dell and Gateway, while
Apple Computer "still looks very healthy," he adds. At a closing price of 34 5/8 Tuesday,
Apple's more than 25 percent off its 52-week high of 46 1/2. And, with P/Es of 13x and 12x
for 1999 and 2000 based on earnings estimates of $2.65 and $2.89, it's changing hands at
a slight discount to its long-term growth rate of 14%, according to First Call.
For some reason, pure-PC play Gateway seems to have withstood the bad news better
than competitors Dell and Compaq: At 68 7/16 it's only 17% off its 52-week high of 82 1/2.
That's still reasonable based on P/Es of 24x and 19x estimated earnings of $2.83 and $3.51
for the next two years. Those P/Es are also either in line with or below Gateway's long-term
growth rate of 25%, according to First Call
It won't be clear sailing for technology companies in 1999. "Asia's a question mark, we don't
know what the impact on Y2K will be, [nor] the timing and release dates of certain critical
pieces of technology like Microsoft Windows [2000]," says Morris of T. Rowe Price.
In fact, disappointing earnings announcements could lead to further retreats in the sector. "I
think the speculation over the next couple of weeks will probably ....put a negative spin on
most stocks in the near term, regardless of the fundamentals," says Rick Schutte an
analyst at Goldman Sachs.
But that only encourages the bargain hunters. "Things don't get interesting from a buy
perspective until we get down 20%," says Morris.
Some think they're starting to look pretty "interesting" already. |
