Interesting article on the performance, or should I say underperformance, of tech stocks like UTEK. Also interesting to note that the day it is published the NASDAQ rallies strongly:
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The New York Times
March 26, 1997, Wednesday, Late Edition - Final
Slump in Tech Stocks: Vigorous Correction or Bad Case of Nerves?
By LAWRENCE M. FISHER
Are technology stocks in a bear market? Even as the Dow Jones industrial average and the S.& P. 500 have
continued to reach new highs, technology stocks have endured a protracted slump. And there is little
consensus among analysts whether the tech carnage represents a healthy correction or a bad case of nerves.
There are reasonable arguments for each of these points of view. A correction is a
necessary and healthy market reaction to even the slightest upset when price/earnings ratios are hovering near
100, as they were for some of technology's highest fliers not long ago. Nervous upset could explain the selloff
of stocks with strong underlying fundamentals. And with technology stocks trailing other indexes for 1996 and
the first three months of this year, perhaps the only question left about the bear market is its duration.
The decline in the tech stocks was for a time masked by the strength of the market leaders, but even these
have now succumbed, with the Intel Corporation down 19 percent from its 52-week high, the Microsoft
Corporation down 13 percent and Cisco Systems Inc. down 37 percent.
But the broader tech stock decline was more striking, with the average software stock down 51 percent from
its 52-week high as of March 20, and the average hardware stock down 44 percent, said Roger McNamee, a
principal in Integral Capital Partners, a technology investment fund based in Menlo Park, Calif.
"In any other sector, the decline we have seen would qualify as a bear market," Mr.
McNamee said. "In technology, this is just another day at the office. The technology
market always vacillates between mania and panic. That is inherent in the beast."
While product transition issues and the strong dollar have constrained earnings at some technology companies,
Mr. McNamee said these effects should be temporary. Still, he was uncertain how the market would respond.
"I think that by the end of the year, fundamentals will look great, but what I don't know is what the market will
pay for them," he said. "That's the central issue in tech stocks today."
Michael Murphy, publisher of the California Technology Stock Letter, said the strength in fundamentals will
become apparent as soon as Intel reports its first- quarter results on April 14. "The demand for not a single
product has slowed down," he said. "I don't see how you can have a technology bear market when the
underlying business is growing 20 percent a year. If the market is going to reward good earnings, there will be
good earnings."
For some of the hottest technology stocks, a correction was necessary, Mr. Murphy said. "Thirty percent
growth is probably not worth 100 times earnings and we had to make that adjustment," he said.
"It's probably healthy. The only thing that worries me is the really high-flying
communications stocks tended to be held by momentum funds and those folks are in net redemptions now.
They are selling stocks because they weren't holding any cash."
Momentum players buy shares based on their price movement rather than underlying fundamentals like
earnings. Because they buy shares that are already moving up rapidly and sell during steep declines,
momentum players tend to exaggerate price swings in both directions.
Even if technology stocks rebound, Mr. Murphy said he was uncertain whether small investors would increase
their stakes in funds weighted with these shares. "When the stocks turn back up and the funds do better, will
people start putting money in, or will they wait until the fund gets back to where they bought it and then sell?"
he asked.
The three major San Francisco-based investment banks, Hambrecht & Quist, Robertson Stephens &
Company and Montgomery Securities, all specialize in technology, and are all advising their institutional clients
to be selective buyers of these stocks during the downturn.
"We think technology is going to remain an awfully attractive area in which to have
assets at work," John Rohal, director of research at Robertson Stephens, said.
"Technology's role is just going to get bigger. If there is an issue with growth, it is both temporary and
sectorized."
Those painting a bear market picture point to the period from 1983 to 1990, when
technology stocks trailed the broad market, and suggest a replay has begun. But Mr.
Rohal said that view ignored the fact that while traditional mainframe and minicomputer companies and their
stocks suffered in the 1980's, that same period saw the initial public offerings of Sun Microsystems Inc.,
Silicon Graphics Inc. and the Oracle Corporation. "There were some very attractive technology companies
launched during the period being held up as a downturn in technology," he said.
Bruce Lupatkin, director of research at Hambrecht & Quist, said information technology buyers were taking a
breather while they sorted out the complexities of carrying out an intranet, competing fast network technologies
and new software applications. "There has been a pause here because of product transitions," he said. "The
issue is how long is this period of indecision and when does the market start to discount the recovery."
It may not be too early to start buying shares in market leaders in areas like network infrastructure or intranet
software, Mr. Lupatkin said. "You can start to nibble at a Cisco," he said. "You can start to nibble at
Netscape. Unless you believe Microsoft is going to put them out of business, which I do not, the opportunity is
enormous."
At Montgomery, Thomas Thornhill, director of technology research, was advising
clients to begin buying stocks in networking and data storage.
"What we are seeing is the classic loss of faith that happens from time to time with technology
investors," Mr. Thornhill said. "What we'll see over the next quarter or two as the
companies come back on their ramp with new products is that the earnings will comeback." Then the stocks
will come back too, he said, adding, "Some sectors of technology
have been marked down to bargain prices here." |
