Higher Rates to Hurt Tech Stocks: U.S. Stocks
Outlook (Update1)
By Deborah Stern
New York, May 5 (Bloomberg) -- While technology shares have
weathered rising interest rates since last June, their good
fortune is unlikely to last if the Federal Reserve continues on
its streak of increases, investors and analysts say.
Reports on U.S. economic growth in the past few weeks have
fueled concern the Fed will raise rates several more times this
year. That will curtail spending and squeeze profit margins across
industry groups, some say, and technology is no exception.
Technology stocks soared to double- and triple-digit gains
through mid-March as optimistic investors bet the companies'
earnings growth would surge in the future. The value investors
place on those earnings falls as interest rates rise, though,
making it more costly to tie up money on a bet far into the
future.
``The stocks most vulnerable to rising rates are the
technology shares,'' said Colin Glinsman, chief investment officer
at Oppenheimer Capital, which oversees about $50 billion. ``The
purpose of the interest-rate increases is to slow the economy
overall, and everyone seems to forget that most technology
companies produce capital goods,'' which typically are big-ticket
items bought on credit.
Glinsman's Oppenheimer Quest Balanced Fund has trimmed its
exposure to technology shares to less than 10 percent from 25
percent in 1998. He's has been adding to his holdings of
supermarket chain Kroger Co. and CVS Corp., which manages a chain
of drugstores.
Even technology bull Mary Meeker, an analyst at Morgan
Stanley Dean Witter & Co., says rising rates will matter to
technology shares at some point.
``The true value of an enterprise is the present value of
future cash flows. Always has been, always will be,'' she wrote in
a note to clients two weeks ago. ``Historically, rising interest
rates negatively impact stock prices.''
The technology-heavy Nasdaq Composite Index has slumped 24
percent from its March 10 peak, though it had risen 88 percent
since June 30, when the Fed embarked on a series of five quarter-
point rate increases.
Galvin Remains Bullish
Some investors disagree technology shares will be among the
hardest hit if the Fed continues to raise rates aggressively.
Thomas Galvin, chief investment officer at Donaldson, Lufkin
& Jenrette Inc., said as interest rates rise, corporate spending
on technology could increase, boosting profit.
``Technology will benefit because that's what people will use
to boost efficiencies'' and cut costs, he said. ``We're building
the bridge to the future, and technology is clearly going to
improve revenue.''
He concedes that if the Fed raises rates more than three-
quarters of a point, all industries will get hurt, while he
maintains technology shares will fare better than others.
Three weeks ago, Galvin lifted the portion of his model
portfolio invested in stocks to 90 percent from 80 percent and
advised investors to buy technology shares such as Microsoft Corp.
Cisco, Dell Earnings
Two technology bellwethers will report earnings next week;
Cisco Systems Inc. is scheduled for Tuesday and Dell Computer
Corp. for Thursday.
``The week with Cisco and Dell earnings announcements will be
more important as market movers'' than economic reports, Galvin
said. ``That'll give us some more data points about sales and
demand.''
Analysts polled by First Call/Thomson Financial expect
companies in the Standard & Poor's 500 Index to show 23.1 percent
growth for the first quarter once all companies have reported.
That will be the fastest growth since the fourth quarter of 1993.
Retailers will start reporting profit Monday. Companies
scheduled to report next week include Wal-Mart Stores Inc.,
Federated Department Stores Inc. and Gap Inc.
With most companies having reported earnings, investors will
turn their attention to a report on producer prices next Friday,
before the central bankers meet the following week.
``The Fed meeting is foremost in everybody's mind,'' said
Scott Lewis, managing director of Credit Suisse Asset Management,
which oversees about $1.5 billion. Lewis thinks a half-point rate
increase is probable. ``It'll be the dose of medicine the market
really needs to shake out equity prices and give us a firmer
footing'' to cope with a slowing economy, he said.
Sequoia IPO
Sequoia Software Corp. plans to sell shares to the public for
the first time next week. The maker of Internet software for
corporations plans to sell $42 million in shares, at $9 to $11
each, on Thursday. Sequoia is among other technology companies
that have had to reduce their initial stock sales to draw
investors, after the Nasdaq's drop since mid-March.
Reports today showed U.S. unemployment in April fell to its
lowest level in 30 years and wage growth last month was faster
than expected.
For the week, the Dow Jones Industrial Average fell 1.5
percent, the S&P 500 declined 1.4 percent and the Nasdaq slipped
1.1 percent. The Nasdaq has lost 6.2 percent year to date, while
the S&P 500 has declined 2.5 percent and the Dow 8 percent.
The best-performing stock in the S&P 500 this week was Shared
Medical Systems Corp., which jumped 72 percent. Siemens AG,
Germany's largest electronics and engineering company, agreed to
buy the No. 2 U.S. health-care software maker at a 76 percent
premium to its closing price the previous day.
Novell, Manor Care
The biggest losers were Novell Inc. and Manor Care Inc.
Novell, which tumbled 44 percent. The maker of computer
network software said it earned half what analysts expected last
quarter because sales slowed.
Novell, whose shares have dropped 75 percent from their
February peak, blamed the results on a failure to adapt its
products and selling pitch to compete with new products from
rivals.
Manor Care slid 44 percent after the nursing-home operator
reported profit fell 50 percent in the first quarter and said it
hadn't received an adequate buyout offer.
AT&T Corp. dropped 16 percent, its biggest weekly decline in
at least 20 years, after the No. 1 U.S. long-distance telephone
company said this year's profit and sales will be less than
expected, and first-quarter earnings fell. Growth in AT&T's
wireless and cable-TV operations hasn't been enough to offset
falling revenue in consumer long distance.
The stock's plunge wiped some $24 billion from the company's
market value. |
