U.S. Computer Shares Weather Rising Interest Rates and May Remain a Haven
By Phil Serafino
Computer Shares Weather Rise in Rates: U.S. Stocks Outlook
New York, Feb. 4 (Bloomberg) -- Since the Federal Reserve
began raising interest rates in June, shares of computer and
telecommunications companies have been the only haven in the U.S.
stock market.
Some investors say that's unlikely to change.
The S&P Technology Index has risen 41 percent since June 30,
while eight of 11 industry indexes S&P tracks declined. One, for
capital goods, was little changed. During the same time, the Dow
Jones Industrial Average crept up 1.3 percent.
''The growth rates of some of these companies have just
mesmerized the market,'' said Robert Morris, director of equity
investments at Lord, Abbett & Co., which manages $35 billion in
Jersey City, New Jersey. ''Everything else looks poor by
comparison.''
Morris said many investors have avoided shares of fast-
growing companies when rates are rising in the past. That's
because as rates rise investors are willing to pay less for future
earnings. The higher the price-to-earnings ratio, the less
attractive the stock as rates are rising.
Investors may be paying less attention to that relationship
now, he said, as they seek to benefit from a boom in demand from
computer and telecommunications firms spurred by companies seeking
to improve efficiency.
Moreover, the last time of sustained interest rate increases
by the central bank -- between Feb. 4, 1994, and Feb. 1, 1995 --
the S&P Technology Index gained 15 percent. The Dow industrials
gained only 2.1 percent during the period while the central bank
pushed borrowing costs higher seven times.
Nasdaq Gains This Week
For the week, the Nasdaq Composite Index rose 9.1 percent,
its biggest one-week gain since October 1974. The index, which
closed higher every session, was boosted by a 13 percent jump in
Intel Corp. and a 31 percent surge in Amazon.com Inc.
Those gains came even after the Fed raised rates for a fourth
time in the past year and hinted more increases are to come.
The Standard & Poor's 500 Index gained 5.2 percent, the Dow
industrials rose 2.6 percent and the Russell 2000 Index rose 3.7
percent.
Investors are willing to pay $138 for $1 of profit this year
from Qualcomm Inc., for example, because the company owns the
fastest-growing cellular telephone technology and is expected to
post a 75 percent rise in profit this year.
They'll only pay $6 for each dollar of earnings from
Washington Mutual Inc., the cheapest stock in the Philadelphia
Stock Exchange/KBW Bank Index. Profit growth for the company is
forecast at 9 percent this year.
Still, Qualcomm jumped 25 percent this week after a 27-fold
gain last year, while Washington Mutual rose 1.8 percent for the
week after a drop of 31 percent in 1999.
Qualcomm's relatively high price-earnings ratio hasn't
deterred many investors because ''this market's been focused on
one thing, and that's productivity,' said Philip Dow, a market
strategist at Dain Rauscher Wessels in Minneapolis. ''If you're a
leading-edge company and likely to grow earnings, those are the
stocks people are going to buy.''
While rising rates haven't hurt high PE stocks, they have had
their usual effect on other companies. As the cost of money goes
up, investors forecast that borrowing and spending will slow,
cutting into corporate profits.
That's one reason industrial companies are falling. Since the
Fed started raising rates, the S&P Chemical Index is down 10
percent, the Philadelphia Stock Exchnage Forest & Paper Products
Index has lost 13 percent and the Morgan Stanley Cyclical Index is
down by 13 percent.
Financial companies suffer as the bonds they own fall in
value. The Philadelphia bank index has dropped 15 percent since
the Fed started raising rates last year.
Chips Gained This Week
The biggest gainers in the Dow industrials this week: Intel
Corp., the biggest semiconductor maker, up 14 percent; Hewlett-
Packard Co., the No. 2 computer maker, up 9 percent. Xilinx Inc.,
which makes chips for communications and networking equipment,
rallied 35 percent to a record to lead the S&P 500 higher.
Amazon.com soared after the Internet's biggest retailer said
its losses have peaked, soothing investors who had begun to fret
that its spending on marketing and investments would never pay off
in profits.
''We're in a boom for information technology right now,''
said Morris. Prices may already reflect that boom, though, he
said. He's buying shares of companies that are still relatively
cheap, such as drugmaker Pharmacia & Upjohn Inc., priced at 26
times this year's expected profit, and insurer Ace Ltd., which
sells for 7 times.
Next week investors will be looking at earnings on Tuesday
from Cisco Systems Inc., the biggest maker of networking
equipment, which set a record this week and is up 13 percent for
the year.
With 375 of the companies in the S&P 500 having reported
fourth-quarter profits, the average growth is 21.3 percent,
according to First Call/Thomson Financial. For the year, analysts
expect 17 percent profit growth, more than double the long-term
average, according to First Call.
So far, fourth-quarter profits ''support the notion that
technology companies will continue to deliver strong earnings
growth,'' said James Weiss, head of stock investments at State
Street Research & Management Corp., which oversees $54 billion in
Boston. |
