Still in Love With Tech
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Thursday May 3, 6:14 pm Eastern Time
SmartMoney.com - On the Street
By Matthew Goldstein
<<KEN TORBERT, owner of a small Northern California hotel, hadn't planned to begin buying stocks again until sometime this summer. After suffering big losses last year in his technology-heavy portfolio, Torbert liquidated much of his remaining holdings and took a seat on the sidelines.
But in late March, he jumped back into the stock market a few months ahead of schedule because he was convinced the market was nearing a bottom. And the first thing Norbert did was load up on some of the very same big-cap technology stocks he lost a bundle on last year. Over a two-day period, he invested $25,600 in shares of companies like Cisco Systems (NASDAQ:CSCO - news), EMC (NYSE:EMC - news), Intel (NASDAQ:INTC - news) and Sun Microsystems (NASDAQ:SUNW - news).
Kristen Rogge, another individual investor, is also eyeing the tech sector. Although she hasn't yet ventured back into the market, Rogge says she's putting together a list of fiber-optic and telecom stocks that she intends to add to her portfolio in the coming weeks. ``I'm ready to go and anxious to get back into action,'' says Rogge.
Investors like Rogge and Torbert apparently aren't alone in their belief that tech stocks are poised for a comeback — despite Thursday's 3.4% pullback in the Nasdaq Composite. The tech-heavy index is up about 18% since the beginning of April and showing the first signs of sustained life in months. And sure enough, leading the charge are those crowd-pleasing big-cap techs like Cisco, up 33%, and Juniper Networks (NASDAQ:JNPR - news), up 85%, since the end of March. Even money-losing Amazon.com (NASDAQ:AMZN - news) is up 70% on renewed hopes that the online retailer is getting closer to reaching its own definition of profitability.
The relapsing fever for technology stocks is even infecting the nation's small investment clubs — groups that tend to follow a more conservative investment philosophy. The top three stocks being bought over the past eight weeks by the nation's 37,000 private investment clubs are Cisco, ADC Telecommunications (NASDAQ:ADCT - news) and EMC, according to the National Association of Investors Corp., or NAIC. ``We believe that our community of investors is a bit unusual in that they do usually diversify, but they are seeing this as an opportunity to accumulate companies like EMC and other price-damaged stocks,'' says Mark Robertson, an NAIC editor.
There's nothing wrong with a little bargain-hunting, of course. But some academics, pollsters and others who pay close attention to the behavior of individual investors worry that many still harbor unrealistic expectations for the performance of technology stocks. It's understandable, of course, that investors would have a hard time letting go of those heady memories of tech after a couple of years in which the right stocks gained hundreds of percent in value annually. ``It's just a case of hope springs eternal,'' says Kenneth Froewiss, a professor of finance at New York University's Stern School of Business.
After a year in which the Nasdaq Composite lost more than half its value, Froewiss says he'd expect investors to have adopted a more sober attitude about the kind of annual returns that can be expected from equities in general and tech stocks in particular. Sure, the economy will rebound, he says, but it's unlikely that technology companies will grow at the same rapid clip that they did before the slowdown hit. ``No one piece of the economy can grow forever at eight times the overall [economic growth] rate,'' he says. James Angel, a professor at Georgetown University's McDonough School of Business, blames the Wall Street hype machine for helping to perpetuate the myth in the 1990s that investors have a ``divine right to double-digit stock returns.''
Indeed, while it appears the economy may avert a recession because of the Federal Reserve's series of quick interest rate cuts, there's no sign that businesses are ready to start shelling out big dollars on high-tech products. Some financial analysts estimate that spending by telecommunications companies, for instance, could be down as much as 20% this year from last year. And even though the Nasdaq is down 56% from its all-time high, corporate earnings, both current and projected, have been falling, too. That means the average price/earnings ratio for stocks on the Nasdaq 100 remains well above the historic norm. The current P/E for the biggest Nasdaq stocks, based on trailing earnings, is 50, compared to a historical average P/E of 10 to 15 for most stocks. That means many tech stocks are still pricey by historical standards, even for rapid-growth stocks.
Yet a number of surveys reveal that many individual investors aren't troubled by those still lofty P/Es for tech companies. A survey of 200,000 U.S. households that actively manage their stock investments, for instance, found that a majority of those surveyed think stocks are either fairly valued or undervalued. In the poll, conducted by Northwest Survey and Data Services of Eugene, Ore., 14% of the households said stocks are undervalued, a six-percentage-point increase since the last time the survey was done in 1998. And 20% expect an average annual return of 20% or greater on stocks over the next 10 years despite last year's market carnage.
``This is very bullish. One year of a [down market] didn't have much effect,'' says Stephen Johnson, Northwest Survey's president. ``The level of expected return always has surprised me. It's considerably higher than the history of the market.''
That isn't to say that individual investors haven't learned anything from the past year's market turmoil. A number of investors interviewed — most of whom invest online — say they don't plan to trade stocks as often as they once did, even if the market rally continues. And several said they are planning to diversify their portfolios by adding shares of some financial-services, energy and consumer-products companies. For instance, Rey Pana, a member of the SmartMoney.com investor panel, says he's been adding shares of energy and health-care companies to his portfolio.
But many small investors still say the only way to guarantee that their portfolios grow over time is to bulk up on a healthy diet of big-name tech stocks. ``I agree that when you pay more than 15 times current earnings for a stock there better be good growth to justify it,'' says Torbert. The owner of the Gingerbread Mansion Inn in Ferndale, Calif., says he expects tech stocks to outperform the market's historic norms because money managers have no choice but to keep buying high-growth stocks, given all the money that keeps coming into the system through 401(k) retirement plans. And with all that money destined to flow into the market, the prices of tech stocks should keep rising.
There are finance professors and Wall Street strategists who agree with that line of thinking. And there are others who will argue that stocks merit their higher-than-normal P/Es these days because of almost nonexistent inflation. A dollar of future earnings is worth more today, they say, because its value won't be eroded by inflation.
That may all be so. On the other hand, inflation could well reignite, or baby boomers could well decide to park all their new retirement savings in bonds and money-market funds. If the experience of the last year has taught us anything, it's that trees don't grow to the sky — no matter how many arguments we can come up with for why they should.
That kind of thinking makes some sense and it's undoubtedly a view shared by other investors. But if the future earnings of tech companies don't keep pace with the current escalation in stock prices, the market could ultimately see a repeat of last year's action. This isn't to say that the big-cap tech stocks aren't fine companies. Most of them are. But if last year taught investors anything, it should be the need for more sober and realistic expectations.>> |
