Jan 07, 1999
Will Technolgy Stock's Start to Move
Down?
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The last time I made a prediction about the direction of technology stocks
was back in August of 98'. During the first wave of the technology sell-off,
the NASDAQ Composite was at 1780. I had anticipated that the
Technology Indexes, which include the NASDAQ Composite and the
Morgan Stanley HI Tech Index (MSH) would break out to new highs by
the end of 1998. A feat of which I was criticized by a few emails sent to me
by readers saying, "Your crazy, the NASDAQ Composite will never go near
that by the end of 98'". Well, the NASDAQ Composite barely touched my
target of 2200 in 1998 and blew through my target of 720 for the MSH.
The technology stocks have sprung to life as Microsoft, Dell, Intel, and
Cisco lead the charge. Microsoft's market cap is about $35 billion larger
than General Electric's. Let's look at Microsoft's earnings. They are
expected to earn $2.35 in the June quarter of 99' and $2.81 in 2000.
Microsoft always exceeds earnings estimates and for some reason, I think
that will continue. let's just suppose Microsoft will earn $3.50 for fiscal year
June of 00', instead of the $2.81 estimate. Going forward, that will give them
a PE ratio of about 43, given their current stock price is around $150.
Microsoft typically trades from 45 to 65 times forward earnings. So, their
stock may have some upside left in 99'. If I add 30% on to the other stocks
forward earnings estimates, which include; Dell, Intel and Cisco, I come up
with PE ratios of 39, 24 and 42, respectively going forward.
Many investors think they can beat the market by buying and selling
stocks
The reason why I added 30% onto each earnings estimate was to give a real
world illustration of what PE multiples they are trading at. Historically, they
tend to beat earnings estimates. Despite the fact that their PE multiple may
look a little lofty, they are not trading a excessively lofty valuations to prior PE
multiples. A couple of earnings surprises (on the positive side) and those
stocks could possibly move 20% or more higher in the short term, even
though they have all recently risen significantly.
The reason why I am picking on the large cap technology names is because
they are the ones that are pushing the Technology Indexes higher. All of those
stocks could and most likely will go higher during the next 2 to 3 weeks, I am
currently issuing a yellow signal on technology stocks in general. This means
that you may want to hold off from purchasing technology stocks until a
correction happens. If you do decide to buy shares of technology stocks, use
caution!
I think the NASDAQ Composite could realistically push up into the 2600 to
2700 range, within the next 6 weeks as investors rush in and push them
higher. If the NASDAQ touches the 2600 to 2700 area, it should drift
sideways to lower as the buyers of those technology stocks evaluate, reassess
and ask, "have these stocks run up too fast?"
What's classic about technology stocks is that they can move up and
down, sometimes in sharp swings
This is not a sell signal for technology stocks. Even if it was, investors must
consider the consequences of capital gains taxes, tax brackets... etc. Many
investors think they can beat the market by buying and selling stocks (trading),
hoping to make more money. In most cases, the opposite is true. After capital
gains taxes, commissions and bad timing, more money is usually made by
buying and simply holding stocks. Warren Buffet is famous for his approach
by simply buying and holding solid companies for long periods of time.
What's classic about technology stocks is that they can move up and down,
sometimes in sharp swings. People that buy these stocks sometimes quickly
sell them after purchasing them because they get frightened of their volatility.
They buy them back after they start to go back up. This is a classic mistake
that many investors make and I have done the same in the past. Many
investors tend to buy stock in technology companies that they know little
about or simply do not understand. They feel good when it goes up, but then
panic when it goes down. This adds to the volatility in the shares of many
technology stocks.
In short, enjoy the ride while it lasts. Technology stocks will move higher
during the short-term, but the real question is, "For how long?" The answer, 5
weeks at the most.
Mark Johnson Editor IFC
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