"Cruising for a Fall in Tech Stocks?
By Pierre Belec
NEW YORK (Reuters) - The recovery of technology stocks is still a great illusion and investors may soon find out -- again -- that owning a piece of the once-hot New Economy is not as thrilling as it used to be.
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Last year was supposed to be the worst of times for technology companies. The betting was 2002 would be a recovery year. But the horror stories are still making headlines.
Just about everything technology-related was back in Wall Street's dog house this week after a slew of heavyweights didn't deliver the numbers they had promised in the first quarter. Earnings targets were missed as revenues shrank. Companies are pushing their profit recovery forecasts as far out as next year because the demand drought has gotten worse.
Yet investors haven't given up on the tech stocks and they've priced them out of this world. The sector commands an incredibly high price-earnings ratio of 40 times expected earnings for the next 12 months, or twice the P/E of the average stock in the Standard & Poor's 500 index.
Investors' appetite for risk remains high even after hundreds of billions of investment dollars went up in smoke when the market bubble burst in March 2000.
What's happening is some people have bought into the idea that stocks that have been battered for so long are going to eventually come back up.
EVEN GROWTH HAS SPEED LIMITS
Others believe the tech sector can sport a spectacular premium because it is one of the economy's few dynamic areas. But history is full of examples where "terrific investments" such as railroad and automotive stocks, with awesome growth prospects, had clear speed limits.
Big companies like Microsoft, International Business Machines, Oracle, Sun Microsystems and telecom giant AT&T, which reported a loss of almost $1 billion in the first quarter, are confirming that demand for tech stuff is not anywhere near what it seemed during the boom of the 1990s.
"The former bluest of blue chips, AT&T, has announced a 5:1 reverse stock split, which is a course of action that was formerly reserved for the weakest companies," says Kent Engelke, capital markets strategist for Anderson & Strudwick Inc. "Will other marquee names follow AT&T's lead?"
The heart-shocking plunge in telecommunication stocks may be a sign of things to come for tech-related companies.
Many of the telecom start-ups that came to market in the late 1990s are bankrupt. And those that have survived are having a hard time making ends meet.
Swedish telecom equipment maker Telefon AB LM Ericsson's stock sank to a five-year low this week after asking its stockholders for $3 billion of new funds. Finland's Nokia posted a bigger-than-expected loss just weeks after Canada's Nortel Networks drew down a whopping $1.75 billion in bank credit and Moody's Investors Service cut its debt rating to junk status.
Lucent Technologies slashed 6,000 more jobs this week, dropping its workforce to half its peak size. WorldCom's stock, which traded as high as $60 during the boom years, sank this month to less than $6 after cutting its sales target. The company's rating has been downgraded to just above junk.
By one estimate, more than 90 percent of mutual fund managers held "must own" stocks like WorldCom, Cisco Systems, Microsoft, Dell Computer and Intel after the stock market bubble imploded in 2000. Two years later, the Nifty Five are down on average by 69 percent, which would suggest that a lot of investors are holding on to stocks that are under water.
Engelke says the risk is that the entire stock market could be undermined if these five stocks were suddenly hit by a mass exit.
"The shares would plummet as the buyers would be scarce by virtue of the massive ownership position," he says.
A sign of the tough times: The biggest names in technology -- Microsoft, Cisco Systems and Dell Computer -- did not make Business Week's list of the 50 best-performing companies in the Standard & Poor's 500 this year.
More ominous: The Nasdaq composite index, which is 70 percent tech-driven, is at a six-month low and off 12 percent for the year.
INEXHAUSTIBLE DEMAND?
The ugly truth is that companies are not rushing to load up on technology, proving the argument wrong that demand was inexhaustible for the latest productivity-boosting computers.
Corporate spending on computers dropped last year for the first time since 1958, falling by 8.4 percent. The best that can be expected in 2002 is that spending will be flat as chief financial officers focus on buoying their companies' earnings and put corset-tight restrictions on tech budgets because of uncertainty about the economy.
After years of excessively high expectations and investment, tech consumption has reached the saturation point and businesses are pulling back.
The smart money says that another quarter or two of bad results will finally convince tech groupies to remove their rose-colored glasses and wonder about the wisdom of over-valuating a sector at a time of shrinking corporate profits.
Few people in the real world expect the technology-related companies to report tremendous earnings for the next several quarters.
The earnings of Corporate America will recover at some point. But historically, there has been a lag of a couple of quarters between the time corporate earnings bounce back and tech spending rebounds.
Prudential Financial, which has consistently been optimistic about the sector, recently warned its clients not to expect technology shares to return to the glory seen in the 1990s boom.
Pay attention to the forecasts that the economy will recover, but that it will be a profitless recovery for many companies. Put another way for stock investors: Ignore these forecasts at your own peril.
What's scary is the Street has been saying that technology companies will have to rebound in order for the stock market to pull out of its funk.
Now that tech stocks have been pumped up, there's a risk the entire market may be setting itself up for a fall if there's a sudden shift in sentiment. Investors may discover the risk of being "in" tech stocks may be greater than the risk of being "out" of them.
ROUGH TIMES FOR TECHS
The scary stuff doesn't end there. The tech sector typically falls on hard times between April and October. So things could get worse before they get better.
Moody's says telecom/high technology/Internet companies led the list of debt-ratings downgrades in the first quarter of 2002, accounting for 30 percent of the total number issued for U.S. companies. The sector is struggling with a huge debt load after the companies mortgaged themselves up to their eyeballs from 1994 to March 2000 when their stocks soared 42 percent each year.
"The telecommunications/high technology/Internet boom ended up as one of the greatest speculative bubbles of all times," Moody's says.
Amen.
For the week, the blue-chip Dow Jones industrial average fell 346.39 points, or 3.4 percent, to finish Friday at 9,910.72 -- its first close below 10,000 since Feb. 22. In fact, all three major stock indexes racked up their biggest weekly losses since the week after the Sept. 11 attacks. The tech-loaded Nasdaq composite index slid 132.93 points, or 7.4 percent, during the week to end at 1,663.89. The broad Standard & Poor's 500 index lost 48.84 points, or 4.3 percent, for the week to close at 1,076.32. |
