Here is an article from thestreet.com about the correction not being over until the big caps melt down:
Top Stories: Far from the Peaks in Silicon Valley
By Eric Moskowitz
Staff Reporter
10/5/98 5:44 PM ET
Until today, the big tech stocks had held up pretty well through the market's
retreat.
Dell (DELL:Nasdaq), for example, hit an all-time high just last Monday.
But now even the best-run tech companies in America are on the run
because investors fear companies will pull back technological investment,
say analysts.
This morning S.G. Cowen's networking analyst Chris Stix downgraded
Cisco (CSCO:Nasdaq) on fears that "corporate spending appears poised to
slow, putting growth estimates at risk." If growth is slipping, so the bearish
theory permeating the market goes, then the fast-growing techs should be
hit the hardest.
At the height of selling, the Nasdaq Composite index was off 103 as tech
standard bearers wobbled amid fears that corporate America will cut
spending on technology.
"The last of the Titanics are falling," says Craig Johnson, an analyst and
principal of the Pita Group, a tech research consulting firm. "Even Cisco
and Lucent (LU:NYSE) are getting hit by that downgrade this morning
because they still have relatively high P/Es."
"Anything with a high valuation has the potential to be whacked now,"
says Daniel McKelvey, a money manager at Forte Capital who points to
the recent steep decline of another software mo-mo stock, Peoplesoft
(PSFT:Nasdaq). McKelvey believes that investors are just now deciding to
sell their most profitable picks as well. In fact, it seems as if the only safe
place right now is to get out of U.S. equities entirely, says one London
hedge-fund manager who trades U.S. stocks.
"Everything is getting painted with the same ugly brush," the manager
says. "It's indiscriminate." He says a lot of momentum investors can't resist
the lure of the bond market. "I mean, why would you risk money on Cisco
when bonds seem like a sure thing?"
He says he shorted both Cisco and Lucent in recent weeks. "Cisco was
priced for sheer perfection," he says. "But these are not perfect times. The
worrying thing is that no one has really brought the numbers down, but the
stock is way off. That just shows you how much trading momentum was in
these stocks."
Investors are worried that corporations will buy fewer routers and switches
from the likes of Cisco, which fell 7 9/16, or 14%, to 48 5/16. Banks and
investment houses, whose stocks and profits are under pressure, are cutting
back on their technology spending, according to a Cowen research note.
Four of 11 companies told Cowen they cut their IT budgets in the last
three months.
Banks are vital to data networking. Cowen estimates that financial-services
companies account for roughly 15% to 20% of Cisco's revenue.
Financial-services customers spend 6% to 7% of projected revenue on
information technology products, according to a recent survey by
Information Week.
One Cisco investor thinks corporate spending is healthy, but the
financial-services sector is an important one to watch.
"In isolation, it wouldn't hurt them that much," says portfolio manager Lou
Giglio with American Express Financial Advisors. But if banks slow
spending, followed by insurance companies, followed by other sectors, it
will create a problem for Cisco, Giglio says. He is long Cisco.
Cisco's other challenge is winning business with telephone carriers, which
make up a quarter of its revenue, according to Cowen estimates. Carriers
have become the high-growth customers of the future.
One piece of upbeat news came out Monday from NationsBanc
Montgomery PC analyst Kurtis King. In a note to clients, King wrote
negative things about six stocks he covers but had kind words about Sun
Microsystems' (SUNW:Nasdaq) upcoming quarter. He says that the
enterprise hardware maker could beat analysts' estimates of 49 cents by a
nickel. (Montgomery did not participate in any recent underwritings on the
company and King currently has a buy on the stock.)
Pita Group's Johnson adds that even the top-tier Internet stocks, such as
America Online (AOL:NYSE) and Yahoo! (YHOO:Nasdaq), are starting to
look suspect. "News is filtering out that companies are cutting back on ad
spending and that could lead to a slowdown in Internet advertising down
the line," he says. AOL dropped 4 3/16, or 4%, to 103.
"The big ones -- AOL, Yahoo and Amazon.com (AMZN:Nasdaq) -- are the
ones that need to be hurt here," said Morgan Frank, an analyst at Hollis
Capital Management. "People have been hiding in these things, thinking
that they never go down. But this is how corrections finish."
Money managers expect more pain. "Our general feeling is that until the
king and queen get shot, things are going to keep going down," says
Charles Haney, an analyst at Masters Capital Investments. Haney is
guessing that Nasdaq can drop another 10%.
That kind of talk could easily chill the market. We are now far away from
that brilliant August day when enterprise software bellwether SAP
(SAP:NYSE ADR) hosted a street party on Wall Street to celebrate its New
York Stock Exchange listing. At the end of the sun-soaked,
volleyball-filled day, the German company's stock closed at 60 and the
Nasdaq was at 1851.
After Monday's close, SAP was at 30 and the Nasdaq was at 1536. You do
the math. |
