September 3, 2001
New Tech Slide Testing Investors
Stocks: Many shares are precariously low; once psychological thresholds are
crossed,
it's a long way back.
By THOMAS S. MULLIGAN, TIMES STAFF WRITER
NEW YORK -- The technology sector,
already beset with overcapacity and
anemic demand, faces a further threat
from deteriorating investor psychology in
the wake of the stock market's latest slide,
some Wall Street experts believe.
Investors who saw their major tech shares
plunge to multiyear lows in the spring, then
rebound, felt twice burned last week as
some of the most widely held names
tumbled to new lows.
Collapsing stock prices make it harder for
tech companies to raise capital and to
maintain morale among employees, many of whom consider
stock options and discounted shares a major part of their
compensation. The latest tech-stock skid, which claimed several
acknowledged leaders in their business niches, came amid more
signs that the industry's downturn in sales and earnings hasn't
reached bottom.
Stark evidence was provided by Sun Microsystems Inc.:
Company executives said Wednesday that their confidence in
earlier sales targets had evaporated. Analysts scurried to mark
down their estimates for 2001 and 2002 sales and profits at Sun
and its competitors and suppliers.
Sun's shares fell as low as $10.40 in Nasdaq trading Thursday,
crashing through the April low of $13.04 to the lowest price since
December 1998. The stock edged up to close at $11.45 Friday,
but still lost 23% for the week.
From its record high of $64.31 in 2000, Sun stock has fallen
82%. Losses of that magnitude, or worse, are typical across the
tech sector.
The tech-dominated Nasdaq composite index closed Friday at
1,805.43, down 64% from its 2000 peak, though it remains 10%
above its April low of 1,638.
"These stocks aren't going to move materially higher until there's
some sense that the environment has turned around," said Philip
Orlando, chief investment officer at Value Line Investment
Management.
Other tech notables hitting new multiyear lows last week included
WorldCom Inc., Oracle Corp., Yahoo Inc., Global Crossing and
JDS Uniphase Corp.
All five, like Sun, were cited by analysts last April as being in
danger of falling below $10 a share. Global Crossing and JDS
Uniphase since have dropped into single digits, while the others
hover precariously two or three dollars above that line.
The $10 mark is of mainly psychological significance, but some
money managers and individual investors tend to rule out
single-digit stocks as too speculative. Moreover, most brokerages
no longer consider a stock to be valid collateral for margin loans if
it falls below $5.
Stock market "technicians"--Wall Street's charts-and-graphs
wizards--say major tech shares' slide back to their spring lows
doesn't necessarily foretell more gloom. They say that a stock's
"retest" of previous lows can be a healthy first step before a
rebound can ensue.
But if the retest "fails" and prices continue to fall, the effect on
investor psychology can be devastating.
The loss of faith in once-popular stocks can cause them to lag
behind the broad market long after the companies' business
fundamentals have begun improving, some analysts warn.
"When you start a slide like this, you can overshoot the other way
just as you did on the way up," said Arthur Micheletti, chief
strategist at money management firm Bailard Biehl & Kaiser in
San Mateo, Calif.
Another factor acting as a head wind against big tech stocks is
that the companies' earnings expectations are dropping as fast as
or faster than the share prices, in many cases. The result is that
the stocks' valuations--price-to-earnings ratios, for
example--remain high relative to the average stock.
"Even where they are, many of these stocks aren't exactly
cheap," Micheletti said.
Shares of Sun Microsystems, for instance, now trade for 57 times
the 20 cents a share analysts on average expect the company to
earn in the fiscal year ending in June 2002. Even based on the
average fiscal 2003 earnings estimate of 48 cents a share, the
stock's P/E is 24.
The average U.S. blue-chip stock, by contrast, is priced at about
19 times estimated 2002 earnings, and less than that based on
expected 2003 earnings, assuming of course that the economy has
recovered by then.
"Is Sun going to 15 times earnings?" Micheletti asked. "I don't
know, but it could happen."
Even if the economy overall rebounds, there are good reasons
technology companies--and technology stocks--could continue to
lag behind, experts say.
Fiber-optic-equipment maker JDS Uniphase and competitor
Corning Inc. typify the extreme overcapacity in some tech
sectors, Value Line's Orlando said, citing industry estimates that it
could take 10 years to fully utilize the fiber that already has been
installed.
The global tech-equipment binge sparked by worries about the
year 2000 computer bug crammed several years' worth of
technology purchases into several months in 1999, he said. Many
businesses see no need to boost tech spending any time soon.
Aside from fundamentals, major tech stocks could lag simply
because--whether rational or not--investors often will shy from a
sector that recently has caused them great pain, said Edward
Riley Jr., chief investment strategist at State Street Global
Advisors in Boston.
For example, biotechnology stocks rocketed in 1991 and 1992,
then quickly collapsed. Many investors stayed away from the
sector until 1999.
Japanese stocks offer the most dramatic example of what can
happen when a hot bull market implodes. Japan's Nikkei
225-share index peaked in 1989 at 38,915 and never again got
close to that level. Last week, the index fell to 10,713, its lowest
since 1984.
Things could get worse for U.S. tech stocks soon, if more
companies warn about an earnings shortfall this quarter, Riley
said.
Yet technology is "still one of the best secular areas for growth"
that investors can find, if they can take a longer-term view, he
said.
Riley recommended that investors stick with proven leaders with
strong balance sheets and cash flow--companies such as Cisco
Systems Inc. and Dell Computer Corp.--that have the
"survivability" to get through even another year of misery.
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