It's going <--- That Way --->
Heard On The Street: Some Fear Tech Shares May Continue Downfall
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By Susan Pulliam
Staff Reporter of The Wall Street Journal
Don't look now, but a bear market may already have descended on
technology stocks. Could that spell more trouble ahead for the rest of
the market?
Since the end of January, technology stocks have been in a steady
decline while the Dow Jones Industrial Average has held a year-to-date
gain of 7%. Morgan Stanley's high-tech stock index has dropped 14% from
its peak on Jan. 20 and the tech-heavy Nasdaq Composite Index has fallen
7.8% from its Jan. 22 peak.
That has led at least one market pundit, Morgan Stanley's Barton
Biggs, to declare that a bear market has crept up on the technology
group, masked until recently by a continued rally among the largest tech
stocks such as Intel, Microsoft and Advanced Micro Devices. Now that the
bigger stocks are also getting hit, he says, the carnage is becoming
more obvious.
"In real terms a bear market has begun," said Mr. Biggs in an
interview yesterday. "I believe the tech cycle has peaked," he said,
elaborating on comments made to clients on Monday in a conference call,
following a note he sent to clients last week on the same subject.
"Orders and shipments won't decline. But the rate of growth will slow
to 10% from 20% or 25%," he says. And, he adds, "prices are continuing
to go down but instead of a 10% decline, it will be a 15% decline. These
companies are leveraged for growth. Their expenses require them to grow
at 15%. So, the combination of those three trends will have a
devastating effect on technology stock prices," he says.
What's worrisome to investors is the fact that the biggest technology
stocks, which held up well until the end of January, have also been
taking it on the chin lately, just as the rest of the market starts to
falter. By contrast, many technology stocks, particularly small- and
midcap issues, never fully recovered after last July's correction, when
tech stocks led a broad market decline of just under 10%. A good example
is Iomega, which peaked at about 55 in June, and still hasn't come
anywhere close to regaining its lost ground, closing yesterday at 14
3/4, up 1/8.
Starting in the week of Jan. 20, the big-cap technology stocks began
to get pulled under as well. On Jan. 22, International Business Machines
fell 10 points to 158 after IBM reported fourth-quarter results that
fell short of forecasts. That news dragged the Dow industrials down as
much as 70 points in early trading before the index recovered to close
down 33.87. IBM has since fallen 17%, while the Dow remains within 2.7%
of its peak reached earlier this month.
The next big blow came on Friday, Jan. 24, when worries surfaced
about a slowdown at Cascade Communications, a computer-networking
company. And on Tuesday, Jan. 28, another networking company, 3Com
Corp., gave investors a similar warning, causing a sharp drop in its
shares that contributed to an intraday drop of 100 points in the Dow.
Since then, shares of Cascade have fallen 60% while 3Com shares have
been shaved nearly in half.
Few big technology names have been spared. Cisco Systems is down 34%
since its peak on Jan. 21, while Sun Microsystems is down 20% since its
peak on Feb. 13. Even mighty Microsoft has begun to list in recent
weeks, falling 3% since its peak on Feb. 4. Indeed, Mr. Biggs says the
big tech names that haven't yet corrected are particularly vulnerable.
"The big declines to come are in the big-cap tech stocks, specifically
Microsoft. It's not down much at all," he says.
Will the broader stock market follow? Mr. Biggs thinks the market has
at least one last spurt before running out of gas, based on his belief
that interest rates will fall in coming months, leading to "a final
glorious surge" in the overall market. Tech stocks, on the other hand,
he believes are in for a "growth recession" that will last "several
years" at least.
Not everyone agrees. "It's quite unlikely we're entering a bear
market," says Merrill Lynch's semiconductor analyst, Thomas Kurlak, who
held an upbeat conference call with clients yesterday morning. "From our
perspective, chips are raw material for the electronics industry and
demand is strong. It's hard to believe the end market is having a
problem. Businesses are shifting to higher-speed computers," he says.
However, the occasion for Mr. Kurlak's call was a disappointing earnings
release by chipmaker Micron Technology, whose stock promptly dove 4 1/8
to 40.
Mr. Biggs's comments have irked a few technology experts. Paul Wick,
who manages the $3.5 billion Seligman Communications and Information
fund, says "its obvious Mr. Biggs is unaware of what valuations should
be." Mr. Wick says he was so annoyed by Mr. Biggs's comments that he has
cut back trading with Morgan Stanley as a result.
Still, Mr. Wick says he is feeling the effect of the downturn in
technology names. His fund has seen "modest" net redemptions in recent
days. And other funds are said to be experiencing net redemptions, a
trend which would exacerbate the selling in technology shares if
portfolio managers need to raise cash to make payouts to investors.
Technology investor Roger McNamee of Integral Partners, a money
manager in Menlo Park, Calif., also puts a more positive spin on the
recent developments. "We are entering a weeding-out phase in 1997. Once
the winners are identified, those investments will be killers," he says.
What does Mr. Biggs see that would lead to a bear market, rather than
an easier-to-stomach correction for technology stocks? Demand,
especially among corporate users, may grow at only half the rate it grew
last year, he predicts.
"It's simply a case of too much technology equipment having been
stuffed into information technology departments that can't effectively
digest it. Users are questioning the payback they are getting from their
massive investments in (technology)," he said in his March 10 note to
clients. Since demand among retail buyers began to slow last fall,
technology bulls have argued that corporate demand remains as strong as
ever.
The idea that corporations might slow their purchases has caught on
with some investors. Says one trader, "People are wondering, is the
fraction of a second that you gain in computing speed from an upgrade
worth the spending that's going on?"
Meanwhile, says Mr. Biggs, technology companies have less and less
pricing power, as more components become increasingly like commodities.
For instance, prior to the end of 1996, investors say, excess demand
created a shortage for adapter cards, giving 3Com pricing power in its
adapter cards business. That shortage no longer exists, however, say
some investors, which has hurt 3Com, along with a slowdown in its
business in Japan and Europe.
The bigger problem, he says, is too much capacity. "This tech boom
began in 1991 when the capital spending cycle picked up. Basically,
rising prices and a speculative environment led to an infinite ability
to raise money for technology companies," he says. That has led to
increased competition among technology companies and an oversupply of
new products.
Now, says Mr. Biggs, it will take a number of years for the situation
to correct itself. "In my view, this is the beginning of a new growth
recession in technology. A fresh up-cycle will not begin for several
years at least. After all, the previous cycle peaked in 1984, and a new
one didn't begin until 1990."
But wait a minute. Hasn't one of the arguments behind ever-rising
technology stock prices been that the technology industry's earnings
were no longer cyclical, meaning that they deserved higher
price-to-earnings multiples? After all, the profusion of personal
computer sales has been driven by rising usage of computer networks both
at home and in the office.
Unlike technology bulls, Mr. Biggs argues that they are as cyclical
as ever, with their fortunes tied to the ebb and flow of the economy.
Indeed, a big part of his argument for why technology stocks should be
in for a bear market is that he believes the economy is slowing. Indeed,
he forecasts disinflation and a 30-year bond that could drop to as low
as 5% over the next year and a half.
Some say it has been clear since as far back as fall 1995 that the
semiconductor business was as cyclical as ever, as excess capacity drove
chip prices lower and lower. It was then that Micron began a lengthy
decline from a peak of 94 3/8 on Sept. 11, 1995, to its current level of
40. Mr. Biggs, for one, believes that's when the seeds of the bear
market took root. |
