Rick any thoughts. Lull in the Party for Year-2000 Stocks
By BARNABY J. FEDER
The New York Times
No one yet knows how much digital mayhem the world will face when the year 2000 arrives. Filings with the Securities and Exchange Commission suggest that repair and contingency planning projects are just now building up steam at many companies.
That might lead to the assumption that companies helping corporate America battle the so-called millennium bug have a rosy earnings outlook. But the Bloomberg Year 2000 index of 34 stocks in this field has lost 34.6 percent this year, compared with a gain of 11.7 percent for the Standard & Poor's 500.
A second year-2000 index, designed by Peter de Jager, a well-known year-2000 consultant, is down 8.8 percent this year even though it defines the year-2000 universe more broadly than Bloomberg does.
What's going on? Let's start by recalling the story line that once thrilled investors in these stocks: Big problems will arise from the fact that many computers use just two digits to represent years, and do not recognize "00" as 2000. Some machines read "00" as 1900; others are flat-out mystified. Analysts have projected that as much as $600 billion will be spent to solve the problems.
Investors started searching for year-2000 beneficiaries in the mid-1990s, even before most companies started working on the problem. Established software and computer companies responded by developing and spotlighting their year-2000 wares.
Some, like Viasoft Inc. and the Computer Horizons Corp., used the rising interest as a springboard for going public. The Zitel Corp., a specialist in computer memory devices, bought an interest in a small year-2000 code repair company, the Matridigm Corp., in 1995; Zitel's stock, which had been languishing at about $5, surged to more than $60 by late 1996.
As a group, year-2000 stocks outperformed the market by a wide margin in 1996 and 1997. Even including the underperformance this year, the Bloomberg index is still up 34.9 percent, annualized, since the beginning of 1996, compared with just 21.4 percent for the S&P 500. And the de Jager index is up 35.8 percent, annualized.
The time is long past, though, for the strategy that Damian Rinaldi, who follows the sector for the First Albany Corp., described as "buy a basket and empty it as the leaders emerge." Over the past year, more and more investors have begun treating many year-2000 companies as yesterday's investment fad.
"During 1997, anything associated with the year 2000 got a premium," said Stan Corker, director of technology research at Emerald Research, a Lancaster, Pa., firm whose clients include institutions and mutual funds. "Now, investors are more concerned with whether these companies will fall off a cliff on Jan. 1, 2000."
Millennium Redux
The Bloomberg Year 2000 Index, tracking the stocks of companies that aim to help businesses cure the millennium computer bug, has tumbled from its high earlier this year.
These days, there can be steep price declines at almost any sign of earnings or revenue shortfalls. Viasoft is trading at $4.9375, down from its 52-week high of $44 last October. Peritus Software Services, a company that, like Viasoft, automates the search for year-2000 problems, plummeted late last year and now trades at $1.09375, down from a high of $29.125 last October. Data Dimensions, which hit its 52-week high of $35.50 a year ago, now trades at $15.125. And Zitel closed at $3.34375 on Friday.
These and other hard-hit companies are all associated with the first stages of year-2000 projects: assessing where the problems lie and repairing the right computer code. Although revenues and earnings grew rapidly at first, they appear to have peaked sooner -- and at lower levels -- than Wall Street had expected.
Much corporate spending seems to be going not toward repairs but toward avoiding the problem by buying new computers and software.
One bright spot has been companies like Compuware that have emphasized not just their repair capabilities but also so-called later-stage tools like software for testing completed repairs. Stocks of companies like Keane Inc., with broader information management skills, fared better than the Viasofts of the year-2000 universe, but have also weakened.
Keane, for example, has probably seen its year-2000 business peak at $102 million, or 37 percent of revenues, in its most recent quarter, according to Richard Park, a securities analyst at Merrill Lynch. Now investors may be wondering how quickly its year-2000 work will tail off and how rapidly it can win new outsourcing contracts and other business from big corporate computer users. Keane's shares are at $31.75, down from their peak of $60.9375 on July 8.
"The issue for everyone is whether year 2000 is a long-term source of leverage with clients or whether it will disappear without a trace," said Rinaldi of First Albany. He and many others say that year-2000 stocks will remain volatile but that investors have become too gloomy about many of them.
He maintains a buy on Keane, and strong buys on Compuware, Mercury Interactive and Cognicase. "Y2K has been a catalyst for growth for all of them but it's not dominant," Rinaldi said.
For its part, Emerald Research maintains buys on Keane and the Mastech Corp., a leader in outsourcing remediation work to programmers in India.
Also seeing possibilities in the sector is Thomas Dorsey, president of Dorsey Wright and Associates, a Richmond firm that specializes in technical analysis. "The de Jager index can spring back just as fast as it fell," Dorsey said, and he recommends that investors buy call options on it.
Major index components that have minor year-2000 exposure, like Unisys and the EMC Corp., are in good shape, he said, and several others, including Keane, are "great bottom-fishing plays."
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