News Flash: Some Tech Stocks Are Overvalued!
By Paul R. La Monica
HOLD ON. I'm hearing some earthshaking news about
tech stocks.
Someone just told me there are a lot of Internet stocks
that are greatly overvalued and many may not survive. A
revelation! And technology stocks probably should not
make up an obscenely large proportion of your portfolio.
No, really?
Wait a minute, what's that? Tech stocks have been inflated
with too much hot air and are about to explode,
Hindenburg-style, all over investors? Oh, the humanity! It
was nice knowing you, Nasdaq. Tech, we hardly knew ye.
This is rubbish. Rubbish! Ladies and gentlemen, tech is
not dead. What we are seeing is a healthy pullback in the
Nasdaq. Anyone who is interpreting the activity of the last
few days as a precursor to a long and ugly rout in the tech
group is deluding himself or herself.
Yes, the Nasdaq has suffered back-to-back-to-back
triple-digit drops (a tumultuous trifecta), but this entire year has been wildly volatile, as we pointed out two
weeks ago. Just look at the graph on this page. It shows all of this year's daily closes for the Nasdaq, as
well as for the Dow and for the S&P 500. The Nasdaq, like that trite saying about life, has been full of
peaks and valleys. It has fallen at least 100 points TWELVE times this year. But it's still up 10%
year-to-date. Someone pass the Dramamine, please.
What investors may have to come to grips with is that an 85.6% annual gain in the Nasdaq is an
anomaly. People got spoiled last year by a Nasdaq that flew through the 2500, 3000, 3500 and 4000
barriers with the greatest of ease. That's not to be expected every year (note to those who may be
thinking that I'm backtracking from earlier bullish statements in my Convergence Day column: That was a
joke!). If the Nasdaq goes up only, say, 30% or so this year (what unspeakable horror!), that would still be
a strong gain in line with what the index has done the last few years ? except last year, of course.
There is nothing I see that would make me think tech as a whole is due for a gigantic swoon. A massive
Nasdaq sell-off will need more than just the mere suggestion of rocky times ahead.
Goldman Sachs guru Abby Joseph Cohen suggests shifting some of your money into cash and reducing
your weighting in technology. There's nothing fundamentally wrong with that. The problem is that it's been
blown out of proportion. The suggestion to put some money in cash and reduce exposure to technology
isn't tantamount to predicting that the Nasdaq will fall 3,000 points.
It's also worth noting that Abby suggested a scaling back of equities in January 1999 from 72% to 70% of
her model portfolio. If you followed that advice you'd have missed out on some of the stock market's gains
last year. Of course, that doesn't rank as a catastrophic misjudgment ? but it does go to show that even
Abby is fallible.
Mark Mobius dissing tech? No offense to Mobius (there's no denying that he is a brilliant
emerging-markets stock picker) but negative comments from a value-stock lover don't exactly have me
itching to bail out of the growth fund in my 401(k) plan. It would be one thing if someone like growth-fund
king David Alger or someone from Janus was expressing serious doubt about the health of tech. But the
market's selling off Nasdaq stocks on the word of a guy whose expertise is looking for value overseas is
akin to people deciding not to go see a new Broadway musical after reading a pan from a critic who
happens to be deaf.
Then there's that infamous Barron's story. Don't get me wrong. Our sister publication did a great job of
showing the precarious balance-sheet situations at many Internet companies ? but the news shouldn't
come as a shock to anyone. It's no secret that investors had been falling for the insane hype behind many
Internet initial public offerings last year. Only now are they starting to realize that the business models of
many of these companies didn't justify said hype.
For me to be convinced that tech is in serious trouble, I'd need to see major fundamental problems with
industry-leading companies, and I just don't see that. One pundit, one fund manager ? no matter how
smart they are ? and a bearish story in Barron's (or is that redundant?) do not spell the end of the tech
market. Yes, companies like CDNow (CDNW) appear to be in trouble. There are a lot of risky
Nasdaq-listed stocks out there. So what? That doesn't mean you sell Cisco (CSCO) to buy Procter &
Gamble (PG) or that you dump all your Microsoft (MSFT) and put the proceeds in a money-market
account. Investors simply have to realize that chasing the Next Big Thing while ignoring the companies
that already rule the tech landscape is a recipe for disaster.
When you have a company like Oracle (ORCL) come in with the spectacular earnings results it reported
earlier this month, it's hard to make the argument that it's time to stick a fork in tech. When you see
Palm (PALM), which I think is suffering more from too much opening-day froth than any fundamental
problems, get sold off after reporting a doubling of sales and better than expected earnings, it's a sign that
reason is not winning the day.
This is not to say that I would shun value stocks entirely in favor of tech stocks (I am continuing my
linguistic crusade, and will steadfastly refuse to use the dreaded Old Economy and New Economy
clich‚s to describe the stock market). But let it be said again: Stocks with more growth potential should
outperform those with less growth potential. Period. The problem, of course, is that growth stocks tend to
get caught up in massive waves of momentum so they often wind up trading ahead of themselves and
need to come back down to earth before resuming another sustained run.
Look at the numbers. I checked out 1,514 tech stocks in the Zacks database. Of those, 848 are not
expected to post a profit this year or next, and investors have every right to be wary of the stocks that are
continually seeing red. But of the 666 tech stocks (Yes, I'm aware of the satanic implication of the
number but that's what came up so please don't email me about it.) with real earnings, the growth rates
are phenomenally better than the S&P 500's.
The median earnings growth rate for these profitable tech companies is expected to be 45% this year and
26% for the next three to five years, while the 500 stocks in the S&P index are expected to post 14%
growth this year and 13% long term. And valuations aren't as ridiculous as you might think. The median
P/E for these tech stocks is 50 times this year's earnings estimates ? certainly high, but not absurd
given the expected levels of growth.
Last week, in my weekly chat on AOL (Tuesdays at 11 a.m. ET ? be there or be square!) someone
asked me where I thought the Nasdaq would end the year. My response, verbatim: "I'm firmly convinced
that leading tech companies have the best growth prospects. Does that mean Nasdaq 5000, 6000 or
7000? No clue. And anyone who tells you otherwise is lying through their teeth!"
I still believe that. In a market where there is opportunity to take advantage of a downdraft in the Nasdaq,
people should be looking at the tech leaders. When you think Internet, think America Online (AOL) and
Yahoo! (YHOO). Both have the clout to weather competition and the heft to make acquisitions in a sector
that clearly will see more consolidation.
Think companies like Dell Computer (DELL) and Qualcomm (QCOM), both with earnings growth rates
of about 35%. Think Cisco. Think Microsoft. Don't panic and sell off proven winners because there are
some troubled e-commerce companies out there that never should have been bid so high by investors.
Now is not the time to abandon tech. Get back to me when Intel (INTC) or Sun Microsystems (SUNW)
winds up shocking Wall Street with a big earnings warning.
And here's one more reason not to worry. In last week's follow-up column about overused words in the
financial press, a reader, Dan Childs, from Fort Worth, Texas, pointed out that every time he's heard the
phrase "tech wreck," it's been a sign of better things to come. Well, guess what? The astute Mr. Childs
sent me an email this morning (with the subject line of "Danger Will Robinson") to inform me that
someone on CNBC called the Nasdaq sell-off ? yo |
