Will, you liked her when she wrote for Forbes. Do you not like her now that she is with the NYT? <g>
June 5, 1998
MARKET PLACE
Despite Bad Forecasts, Investors Still Buying
Technology Stocks
By GRETCHEN MORGENSON
NEW YORK -- Talk about denial. Even as more and more corporate managers
warned that their second-quarter results were looking grim, investors piled into the
stock market. And they piled most heavily into those companies most vulnerable to
near-term earnings disappointments -- the technology group.
When business is looking materially different from what Wall
Street analysts have been expecting -- either up or down --
corporate managers like to warn investors that their
expectations may be a bit off.
For the second quarter of this year, more of these so-called
pre-announcements are not only coming in early, they are
coming in ugly.
As of Thursday, according to Chuck Hill of First Call, which
tracks company earnings, 139 companies had publicly given an
overview of their second-quarter results. Considering that we
still have four weeks to go before second quarter results
actually start trickling in, we are running well ahead of where
we were last year at this time. That's the early part.
Now for the ugly. Of those companies pre-announcing, 58
percent have warned that their earnings will be lower than
analysts are estimating. After Thursday's close, for example, Motorola said it was taking
a $1.95 billion charge against second-quarter earnings and would report an operating
loss.
That 58 percent number should raise an eyebrow, according to Hill. He said the split
between negative and positive guidance on earnings was usually 50-50.
Neither fact from First Call bodes well for the overall market. But the data is particularly
ominous for technology stocks. Managements of these companies are the bulk of those
issuing warnings.
Double denial. These are just the stocks that rallied on heavy buying Thursday. The
Standard & Poor's High Technology Composite index rose 2.2 percent Thursday as
investors grabbed anything they could in stocks of semiconductor makers, networking
companies, personal computer companies and other hardware manufacturers.
What gives? Even as grim news continues to come from technology concerns, investors
seem to think that all the bad news for the industry is already reflected in these
companies' stock prices.
In just the last few days, earnings warnings or other gloomy talk have come from
technology companies as varied as Motorola; Komag Inc., a disk-drive manufacturer,
and Integrated Device Technology, an integrated circuits maker. This on the heels of
worries from industry giants like Analog Devices, which makes integrated circuits;
Applied Materials, a manufacturer of semiconductor wafers, and AMP Inc., the world
leader in connectors.
"These are not just some little guys with problems," Hill noted.
Of course, investors find these stocks much easier to buy now than they were a few
months ago when they were much higher. Even after Thursday's rally, the S&P High
Technology Composite was still 8 percent below its high on May 13.
But what investors seem not to focus on is that even those technology stocks that have
fallen fairly dramatically are nowhere near their lows. Dell Computer, up $4.25 Thursday,
to $84.50, is down 14 percent from its May high. But it's still more than double its
$38.25 price just six months ago. Sure IBM, up $2.18, to $116.06, is down 7.5 percent
from its May 14 high, but it's up 21 percent since March. The S&P High Technology
Composite is 23 percent higher than it was in December.
These stocks might indeed be cheap if one could be certain that any bad news about their
industry or their businesses was already reflected in their prices. But given how glacially
analysts respond to bad news, this is highly unlikely.
Everybody knows that Wall Street analysts accentuate the positive. And they are not
disappointing us now. Earnings at technology companies, these perennial optimists
believe, will rebound nicely in the third and fourth quarters.
Consensus expectations for third-quarter earnings on First Call's composite of technology
companies are an increase of 21 percent. The herd thinks fourth-quarter earnings will rise
15 percent.
The only trouble with buying this argument is that analysts' opinions, not completely
reliable in good times, are exceedingly untrustworthy in bad times. Wall Street analysts
appear to be constitutionally unable to help investors face anything but the cheeriest
music.
This is not just opinion. A research paper on momentum investing strategies found that
analysts are slow to revise their expectations for a company in the face of bad news --
just when you need them most.
Another interesting piece of research on analysts' reactions to bad news comes from two
associate professors of accounting at the Weatherhead School of Management at Case
Western Reserve University in Cleveland.
Co-authors Julia Grant and Robert Bricker found that "when earnings surprises were
negative, analysts were proportionately more positive in the text of their reports than one
would expect," according to Ms. Grant. In other words, when analysts are faced with the
harsh reality of reporting a negative number for a company, they work overtime to
counter the unpleasantness. No wonder investors get confused.
Bottom line? If you follow the advice of Wall Street analysts on your investments, don't
think for a moment you'll get the whole truth from them when times are tough.
Mark Hulbert, editor of the Hulbert Financial Digest, which assesses the performance of
investment newsletters, said: "Bad news rarely comes out in full. Instead it comes out in
dribs and drabs. There's a very good likelihood that the first downward earnings revision
from an analyst will be followed by another and another and another."
Call it Wall Street's version of Chinese water torture. |
