NY Times. Learning to Live With a Correction in Technology Stocks [No ASND reference but a good article]
nytimes.com
August 31, 1998
MARKET PLACE
By LAWRENCE M. FISHER
orrections are never fun, but they can provide a kind of clarity
that is in short supply during sustained bull markets. For buyers
of technology stocks, which shared disproportionately in both the long
bull run and last week's market rout, now is a time to reassess
portfolios and adjust as necessary.
"When the market corrects, the important issue is not what you
owned going into the correction, but what your portfolio looks like
when it's over," said Roger B. McNamee, a principal in Integral
Capital Partners, a fund specializing in technology stocks. "As painful
as it is to sell things when they're down, corrections like this are the
last opportunity to get the next up cycle right."
Technology stocks are not homogenous, of
course, and there are different reasons for
buying or selling different sectors.
Some technology companies, notably chip
makers and makers of equipment for making
chips like LSI Logic Corp. and Applied
Materials, but also some software
companies like Adobe Systems. and
disk-drive producers like Seagate Technology, have reported
weakening of their fundamentals from the Asia crisis, and they had
significant declines in their stock prices before the broader correction.
They may not see earnings growth for some time to come, and growth
is what usually fuels technology investments. But analysts say the
correction has made some of these companies so cheap that they are
good values.
One theory of technology investing holds that the dominant players in
any field will never look cheap by conventional measures but will,
over the long term, so far outperform competitors that they are a
compelling investment at nearly any price. Under that theory, at
Friday's closing prices, buyers can now buy stock in Microsoft Corp.
at $105.25, a 12 percent discount to its 52-week high; Intel Corp. at
$77, or 22 percent off the 52-week high, or Dell Computer Corp. at
$118.75, an 8 percent discount.
The Internet stocks, whose sky-high multiples of price to often
nonexistent earnings make Microsoft look cheap, are still expensive
by any conventional measure. But major names like Yahoo, which
closed on Friday at $83.0625, down nearly 20 percent from its
52-week high, and Amazon.com, at $105.8906, down 27 percent,
are at least cheaper than they were before. Many technology
investors want to own them, although many would also like to see a
little more price correction in the group.
"Everybody wants to own Internet stocks and would really like to
own them at one-third the price," McNamee said.
He has instead been buying shares in companies that make software
for corporate operations, selling underperformers to buy market
leaders like Peoplesoft Inc., at $27.25, less than half its 52-week
high; Siebel Systems, now more than a third off at $22.50; I2
Technologies Inc., at $16, down 62 percent, and Citrix Systems, at
$63.50, off 16 percent.
"This is an environment where the premium you pay for owning the
best companies has narrowed dramatically," McNamee said.
James Davidson, a managing director at Hambrecht & Quist, said the
correction could serve to separate momentum investors, who trade
stocks based solely on market movement, from long-term investors,
who buy based on fundamentals. Last week's selloff presents an
opportunity to buy established franchise holders and potential growth
leaders at substantial discounts, if investors are prepared to wait for a
return, Davidson said.
"I don't think you can go wrong buying Microsoft, Cisco, Solectron
or Dell," he said.
Among newer market leaders, he likes Siebel Systems, which makes
sales-force automation software; Rambus, a producer of fast memory
chips, and Advanced Risc Machines, which makes chips for portable
computing devices.
"Are you going to make money in the next few days?" he said.
"Maybe not. But over the next three to six months, no question. It's
not a question of whether these companies are good buys, just when."
Although Wall Street continued bidding up technology stocks through
July 20, when the technology-heavy Nasdaq composite index
peaked, many companies had started to foretell earnings shortfalls this
year when they began to recognize the scale of the Asian economic
crisis and its impact on sales. Now, though, so many companies have
cautioned investors about diminished expectations, and enough
analysts have reduced estimates going forward, that some technology
buyers suspect they may see earnings surprises on the upside in the
third and fourth quarters.
Michael Murphy, editor of the California Technology Stock Letter,
said he spent last Thursday and Friday buying stocks among fallen
semiconductor and software companies, including Applied Materials,
LSI Logic and Adobe, which were all down significantly from their
52-week highs.
"You just don't get prices like that on these quality companies that
often," Murphy said. "Fundamental unit demand for technology
products is still double-digit, and I just don't see that anywhere else in
the economy."
Nevertheless, Murphy said, many technology stocks that trade at high
multiples to earnings or revenues have not dropped far enough to
signal the end of the correction.
"Before this is over in the technology sector you've got to take down
Microsoft and Dell," he said. "The Internet stocks still have a long
way to go. That's the purpose of a correction, to flush this stuff out."
John T. Rossi, a managing director with BancAmerica Robertson
Stephens, said the trading system on Nasdaq, where most technology
stocks are listed, had tended to accelerate falling prices for the group.
In Nasdaq trading, a transaction does not occur until a seller's asking
price finds a matching bid by a buyer.
"In times of selloffs, bids tend to disappear," Rossi said. "It's almost
impossible to sell without a huge discount. Everyone gets skittish at
the same time, so nobody knows how bad it is in a particular stock."
In anticipation of a recovery in the personal computer industry next
year, when Microsoft ships the new version of its Windows NT
software for the corporate-network market, Rossi said, it could be
prudent now to buy stocks in the makers of semiconductors, disk
drives and software, naming Intel, Seagate, Micron Technology,
Autodesk and Adobe.
Recalling that Microsoft shares lost half their value in the crash of
October 1987, he said, "Buying some of these technology stocks
now, when it's nearly impossible to make the body and soul do it, is
not a bad policy."
Copyright 1998 The New York Times Company
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