John Waggoner: Tech stocks might be worth a look once more
idahostatesman.com
Since the dawn of time, life has been marked by cycles. Geese fly south in the fall. Trout spawn in the spring. Technology stocks rise in winter.
The bear market has disrupted the tech cycle, to put it mildly. Battered investors would gladly sacrifice a goat or two to restore harmony in the universe and get the tech season started again. A few tech stocks have shown signs of renewed life. And while few believe the technology cycle will begin anew, it may be a good time for venturesome investors to start looking at tech stocks again.
An old rule of thumb — at least until the bear market started — was to buy tech stocks at the outset of the American Electronics Association conference in November, and to sell them at the Hambrecht & Quist Conference in April. (The conference is in early May this year, and the San Francisco investment bank is part of J.P. Morgan Chase.)
Consider the period from January 1988 through March 2000. Had you invested in the technology-laden Nasdaq 100 stock index at the start of each November and sold at the end of each April, you would have gained 620 percent. Had you invested only from May through October, you would have gained 224 percent.
Why the seasonal effect? Christmas buying is one explanation. And before the recession, many companies and government agencies upgraded computers and software at the end of the year, because if they didn´t use their budgeted money, it disappeared on Jan. 1.
Those two buying sprees were enough to keep tech companies humming until spring.
The bear market stopped the tech cycle cold. The Nasdaq 100 index fell nearly 83 percent from March 20, 2000, through the end of September 2002, not pausing at all during tech´s traditional up cycle. Some tech stocks have fallen so far that it will take decades for them to reach their old levels — if they ever do. Lucent, the AT&T spinoff, fell 99 percent from its bull-market peak.
But tech stocks have staged a modest rebound since their most recent pummeling in September. The average science and technology mutual fund rose 8.3 percent the four weeks ended Oct. 23 versus a 3.3 percent gain for the Standard & Poor´s 500-stock index.
Does this mean the technology cycle is returning? Probably not this year, most experts say. But it can be a good time for bargain hunting.
Don´t look for a big bull market in tech soon.
“There are signs that things are still deteriorating,” said Zachary Shafran, manager of Waddell & Reed Advisor Science and Technology fund. Telecommunications, for example, got whomped by too many new high-capacity fiber-optic lines — and by new technology that lets users cram more voice and data traffic into them. The industry is still swamped with capacity, and the slack economy has slowed demand.
Companies that make semiconductors — the chips that power computers — are using about 60 percent of their manufacturing capacity, Shafran said. That doesn´t bode well for semiconductor companies or the companies that make equipment for those plants.
Another argument against the cycle: Plenty of investors who bought tech in the past three years will be happy to sell their stocks or funds when the market rallies, cutting short any major rises in tech values.
Shafran is bearish: About 30 percent of his fund is parked in money-market securities or cash. Many of his stocks are in health care and pharmaceuticals — the science part of the fund´s moniker.
Others say you can find some value among the technology ruins. Dennis McKechnie, manager of Pimco Innovation, predicted two tech areas will fare well in the coming months:
• Cell phone manufacturers. Nokia, the Finnish leader in the field, has seen its stock soar 49 percent to $16.80 the past three months. New cell phones, which offer color, text messaging and better reception, have been hot sellers this year, and are likely to be next year, too.
• Computer storage companies. These companies make hard drives and other devices for saving data. Thanks to ultrafast Internet connections, computer users can download enormous audio and video files. That means they need larger hard drives for storage. Western Digital, one of the top makers of hard drives, has gained 45 percent to $6.19 in the past three months. Earnings are expected to rise to 39 cents per share for the company´s 2003 fiscal year, up from 36 cents per share for the past 12 months.
Jonathan Cohen, manager of Royce Technology Value fund, thinks some decent tech stocks have gotten pummeled beyond all reason. For example, United Online, the product of a merger between Internet providers NetZero and Juno, currently sells for $11.96 a share. Its market capitalization — price times number of shares outstanding — is about $482 million. But the company has about $3.50 per share in cash available for new acquisitions and expansion.
Another favorite, Verity, makes data-retrieval software, and sells for about $9 per share now. The company has $242 million in cash — and it´s making money, too. “It´s too cheap,” Cohen said.
If you´re going to buy individual stocks, don´t forget the lessons of Lucent and other crushed tech stocks. Set a sell price for your stock — say, 9 percent below your initial investment — so you don´t ride the stock down to oblivion. And don´t invest money you can´t afford to lose.
Most people are better off buying tech stocks through mutual funds, which at least offer some diversification. Bear in mind that most diversified funds have a lot of tech. The Vanguard 500 Index fund, for example, has 17.6 percent of its assets in software, hardware or telecommunications, according to Morningstar, the Chicago investment research firm. So add technology sparingly.
What if you already own a tech fund, and it´s causing you deep pain? If you still believe in tech, consider selling the fund before the end of the year. Then buy a tech fund from another mutual fund company. You´ll be able to deduct the loss from your taxable income this year, and you´ll still have a stake in technology.
If you want to get back even, though, you could have a long wait.
The Nasdaq composite index now stands at 1,330. It will have to almost quadruple to beat its high of 5,049. And that could take many seasons to happen.
Edition Date: 11-05-2002 |
