Heard On The Street: Market Escapes Meltdown After Intel Warning
By E.S. Browning
Staff Reporter of The Wall Street Journal
It wasn't exactly a market meltdown.
When Intel warned late Wednesday that revenue and profit would fall
short of expectations, many investors feared a broad market swoon the
next day, as sometimes has followed such bad news from an industry
behemoth.
The Dow Jones Industrial Average yesterday did fall 94.91 points by
day's end. But that was only about 1%, far less than many had feared.
And while some stocks such as Dell Computer took hits in sympathy with
Intel's 13% drop, others fell far less. Some, such as Micron Technology
and Texas Instruments, actually gained yesterday.
The optimists insist they remain hopeful the boom in
personal-computer sales that has buoyed the technology sector still has
room to run. But they are starting to hedge their bets.
And indeed, after the New York market closed, Motorola, whose stock
had finished up, had some bad news for investors. The company said
first-quarter sales would be flat, and its stock plunged 7.4% in
afterhours trading.
A number of analysts maintain that the slowdown in demand for Intel's
microprocessors is simply the result of efforts by computer makers to
cut costs through just-in-time manufacturing. According to this view,
consumers aren't actually buying fewer computers. The computer makers,
pressed by falling prices for their products, are simply trying to save
money by cutting down on their inventories of Intel's chips.
"We continue to believe that the underlying dynamics of demand for
technology products and services remain pretty healthy out there," says
Sally Anderson, senior portfolio manager at Kopp Investment Advisors in
Edina, Minn., near Minneapolis.
Richard Chu, Cowen & Co.'s computer-systems analyst, points out that
Dell has cut its already-low inventories in half to just above one
week's requirements. Compaq Computer also has made big inventory cuts,
and both are pushing their plants to cut inventories even more.
But Mr. Chu says it is almost impossible to tell whether that
explains all the softening in demand for Intel chips. His solution:
Yesterday he downgraded highflying Dell to a buy from a strong buy. But
he retained his strong buy recommendation on Compaq. His reasoning?
Based on its strong earnings news, Dell was up a staggering 65% this
year through Wednesday, while Compaq, which has warned that it is facing
margin pressure, has lost 1% so far this year. Compaq simply looks less
richly valued.
"Dell was trading near its high, so the perception is, Wait a minute
on Dell, let's take a fresh look," he says. "Short-term, risk-reward is
a little more negative here."
That same kind of logic applied to Advanced Micro Devices, an Intel
competitor that already had taken a hit and which gained 2.4% yesterday.
Micron Technology and Texas Instruments, which make memory chips -- more
of a commodity than Intel's microprocessors, which trade on their brand
name and command higher margins -- also closed up in the wake of the
Intel news.
International Business Machines and Compaq both held up better than
Dell, in part because both already were down on the year after releasing
their own warnings about the earnings outlook. Dell and Intel have been
sharply up so far this year, still riding on high hopes. At the same
time, the apparent resilience of IBM and Compaq was partly due to a
technical quirk that may have helped to understate their reaction
yesterday to the Intel news.
IBM and Compaq both trade on the New York Stock Exchange, as well as
on secondary markets such as the Chicago and Pacific exchanges. Dell and
Intel trade on the Nasdaq Stock Market. Official closing stock prices
for Nasdaq stocks normally are taken at the end of trading, at about 4
p.m. EST. They don't reflect any late-day trading. But the composite
close for Big Board stocks can include trading on the other U.S.
markets, which continues as late as 4:30 or 5 p.m. EST, time enough for
traders to react to after-market announcements.
Indeed, both IBM and Compaq fell noticeably in late Wednesday
trading. That drop was counted in their Wednesday composite close, which
made their losses the next day look slimmer. IBM, for example, lost
three points after its New York close Wednesday, while Compaq slipped 1
1/2 late Wednesday, after New York trading ended. Although it isn't
widely recognized, the difference in price-reporting systems can make it
hard to compare daily changes in Big Board and Nasdaq stocks.
The Intel news leaves investors trying to pick winners and losers
among the technology stocks, but it hasn't, at least so far, thrown the
broad wet blanket over the market that many people feared before trading
began yesterday. Many analysts remain optimistic that earnings in
general will continue to grow this year, pushing the market ahead.
Ms. Anderson of Kopp Investment Advisors says she is continuing to
buy technology stocks selectively. She says she believes the Intel
problem has more to do with inventory management by computer makers than
with any profound decline in demand for technology.
Edward Kerschner, chairman of PaineWebber's investment-policy
committee, says, "It is unlikely that Intel's warning is a harbinger of
a very bad first quarter" for the broader market. "I think any
indiscriminate selling of technology stocks would be a buying
opportunity."
He is staying away from semiconductor stocks, however, on the theory
that mounting price competition will create more problems such as those
Intel faces. He thinks tech winners will be further up the food chain:
personal-computer makers such as Compaq, software companies such as
Microsoft and Internet service providers such as America Online.
Mr. Kerschner notes that since the early 1990s, investors have
repeatedly seen the market swoon and then bounce back following earnings
warnings from big players. He expects a similar reaction this time.
He notes that companies typically issue warnings of coming
disappointments, not coming triumphs -- a habit that makes the weeks
before quarterly earnings announcements jittery ones for the market. In
his view, however, investors are beginning to view these events as
inevitable road bumps rather than market disasters. |
