"Tech investing: what to do?"--CNNfn...
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>>> Summer rally may have fizzled, but opportunities still exist, experts say
August 4, 2000: 5:51 p.m. ET
NEW YORK (CNNfn) - The weather may have heated up as we wind our way through the final weeks of summer, but the stock market has cooled off, dashing a lot of investors' hopes for a prolonged summer rally.
A barrage of strong second-quarter corporate earnings reports, particularly among tech outfits, helped lift the market higher in the early part of July.
But rising concerns about the sustainability of the growth of some of those highly valued stocks and lingering fears that rising inflation will prompt the Fed to continue to raise rates seem to have stopped it in its tracks.
Even though Friday's employment data, showing that U.S. job growth stalled in July, alleviated some concerns that the Fed would raise rates at its next meeting later this month, some market observers expect continued volatility in stocks through the remainder of the summer, especially among technology names.
The Nasdaq composite index, which is weighted heavily with technology stocks, ran up 18.5 percent between June 1 and July 15. At the close of trading Friday, the Nasdaq had fallen 10.8 percent below its mid-July level, standing at 3787.36.
The early summer run-up on Nasdaq came on the heels of a brutal correction between March and May that saw many of the high-flying tech shares come crashing down.
So is it now safe to move in and pick up some of these stocks at their lower prices? Have valuations of tech shares come down to more reasonable levels, or is there further downside on the horizon?
Wait it out
"I don't think the correction is over for many of these technology stocks," said Louis Holland, chief investment officer at Holland Capital Management.
Holland said he expects a lot of the stocks in the technology sector to retest the lows they reached in May, and he suggests investors wait it out and reassess their tech holdings in the fall.
"August, September and October, historically have not been good periods," he said. "So I think investors probably can wait."
Meanwhile, Holland said he has his eye on financial stocks, which in many cases are selling at, or at a discount to, their growth rates. He also said he likes some pharmaceutical stocks, although he has some valuation concerns there as well.
Douglas Cliggott, J.P. Morgan's U.S. equity strategist, also said he likes pharmaceutical stocks and recommends investors diversify out of technology.
His concerns stem largely from the outlook for tech revenue and earnings growth, which he said have been strong but appear to be trending down.
"We've had very good [earnings] numbers," he said. "Our guess is second quarter is about 17 percent [earnings growth] versus 20 percent in the first quarter. What has been giving us this extraordinary earnings growth is spectacular earnings growth from a lot of tech companies. They are telling us the second half is going to be slower. So I think the broader market earnings trend is going to be, not sharply down, but trending down."
Pharmaceutical companies have been posting strong and steady earnings growth, which is why they are good to own in an environment where earnings are declining, Cliggott said.
"What usually makes pharmaceuticals go is when the broader market has slowing earnings, people tend to focus on the safety of pharmaceutical earnings."
Diversify
Cliggott is also favoring the beverage and household product sector, but said he dislikes financial stocks, especially companies that lend money to consumers. If there is a slowdown in the economy, consumer spending will decrease and those companies will suffer as a result, he said.
Among Cliggott's top picks are: Pharmacia (PHA: Research, Estimates); Pepsico (PEP: Research, Estimates); Anheuser Busch (BUD: Research, Estimates); Cigna (CI: Research, Estimates); and El Paso Energy (EPG: Research, Estimates).
Ulric Weil, technology analyst with Friedman Billings Ramsey & Co., said lingering concerns about the growth of the economy as well as the high values of some of the bigger-name tech stocks are likely to temper any advances in tech shares for a while.
"It is temporarily stalled because we are approaching [the Federal Reserve policy meeting on] August 22, and there are still some significant economic numbers to come out, so there's clearly nervousness about all this," Weil said.
However, he said he still sees pockets of opportunity in the sector.
"The software segment holds promise because it has been beaten down badly," Weil said. "That's a place where investors could look under the rocks for companies that are not fundamentally in bad shape but have had their stocks beaten down."
Personal computer makers, which have been dragged down by concerns about slowing shipment rates, also represent some good opportunities, Weil said. Sales of PCs and other electronics typically are stronger in the second half of the year because of increased demand during the back-to-school and holiday seasons.
"Related to that is the semiconductor segment," Weil said. "All hardware, whether it's handheld devices, such as cellular phones, servers, they all require lots of chips. The good chip companies such as Intel have talked very bullishly about their picture for the third and fourth quarter."
In addition to Intel (INTC: Research, Estimates), Weil said he sees good buys in chipmaker Texas Instruments (TXN: Research, Estimates); wireless communications software maker Aether Systems (AETH: Research, Estimates); computer services provider Computer Associates (CA: Research, Estimates); Internet companies Inktomi (INKT: Research, Estimates) and Akamai (AKAM: Research, Estimates); and networking concerns Nortel (NT: Research, Estimates) and New Focus (NUFO: Research, Estimates). <<< |
