From this week's Barrons:
September 7, 1998
Sure, the Tech Debacle Is Creating Values, But Pros Are Wary About Jumping Back In Too Quickly
By Eric J. Savitz
Okay, let's assess the damage. It's no secret that the recent stock-market ugliness has taken a considerable toll on technology stocks of all varieties. Most of the major tech indexes have retreated 20%-25% from their highs; some subsectors have suffered far larger drops. The Philadelphia Stock Exchange semiconductor index, the SOX, is about half of what it was late last year; the Amex disc-drive index has dropped 65%.
Across Silicon Valley, there's great hand-wringing about once-valuable stock options with strike prices now far above current stock prices. In the modest neighborhood where your faithful columnist resides, houses that once would have attracted multiple bidders have had their prices slashed. Alas, the tech gazillionaires are worth a few zillion less.
While the slide has been painful, of course, it's nothing new for tech investors. Far more volatile than the general market, technology stocks suffer corrections with surprising regularity.
Chip Morris, portfolio manager with T. Rowe Price Science & Technology Fund, notes that since 1986 there have been a dozen declines of 12% or more on the Pacific Exchange's technology index, about one big slump a year. The worst of those drops came in 1987, a 45% slide; in 1990, the indicator fell 35%. At Friday's close, the PSE stood 22% below its July peak; on an intraday basis, the index at one point last week was off 27%. At that level, the slide ranks as the third-worst since '86.
What's gotten hit? Everything. Since the end of June, scads of big-name tech stocks have suffered mammoth declines, many due to their own failure to meet Street estimates. Computer Associates, LSI Logic, Excite, Intuit, Quantum, Autodesk, Tektronix, PairGain, I2, Parametric Technology, they've all suffered 35%-60% losses. Drop down a notch or two on the capitalization scale and you'll find even larger declines.
Certainly, some tech stocks still boast huge year-to-date gains: Microsoft, Cisco Systems, EMC, America Online, Lucent Technologies, Yahoo, Amazon.com, Dell Computer and Apple Computer all stand 50%-200% higher than where they finished 1997. But even those stocks have backtracked from their highs. Cisco is down 16%; Lucent, about 30%; AOL, nearly 40%.
There's a building consensus that significant values have been created in some segments of the technology landscape, especially among smaller stocks. Most of the investment pros we talked to last week, however, see little urgency about jumping into the fray. For the moment, stock prices seem more tied to events in Japan, Russia and Brazil than to company fundamentals.
Nonetheless, you can make a fairly compelling case that the time to get back in is coming soon. T. Rowe Price's Morris advises looking at three key factors when considering whether to take the plunge. For starters, he says, consider whether the sector's slide is nearing a bottom. Next, examine the attractiveness of current valuations. And third, assess investor sentiment. |
