October 25, 1998
Lull in the Party for Year-2000 Stocks
By BARNABY J. FEDER
o one yet knows how much digital mayhem the world will face
when the year 2000 arrives. Filings with the Securities and
Exchange Commission suggest that repair and contingency planning
projects are just now building up steam at many companies.
That might lead to the assumption that
companies helping corporate America battle the
so-called millennium bug have a rosy earnings
outlook. But the Bloomberg Year 2000 index of
34 stocks in this field has lost 34.6 percent this
year, compared with a gain of 11.7 percent for
the Standard & Poor's 500.
A second year-2000 index, designed by Peter de
Jager, a well-known year-2000 consultant, is
down 8.8 percent this year even though it defines
the year-2000 universe more broadly than
Bloomberg does.
What's going on? Let's start by recalling the story
line that once thrilled investors in these stocks:
Big problems will arise from the fact that many
computers use just two digits to represent years,
and do not recognize "00" as 2000. Some
machines read "00" as 1900; others are flat-out
mystified. Analysts have projected that as much
as $600 billion will be spent to solve the
problems.
Investors started searching for year-2000
beneficiaries in the mid-1990s, even before most companies started
working on the problem. Established software and computer companies
responded by developing and spotlighting their year-2000 wares.
Some, like Viasoft Inc. and the Computer Horizons Corp., used the
rising interest as a springboard for going public. The Zitel Corp., a
specialist in computer memory devices, bought an interest in a small
year-2000 code repair company, the Matridigm Corp., in 1995; Zitel's
stock, which had been languishing at about $5, surged to more than $60
by late 1996.
As a group, year-2000 stocks outperformed the market by a wide
margin in 1996 and 1997. Even including the underperformance this
year, the Bloomberg index is still up 34.9 percent, annualized, since the
beginning of 1996, compared with just 21.4 percent for the S&P 500.
And the de Jager index is up 35.8 percent, annualized.
The time is long past, though, for the strategy that Damian Rinaldi, who
follows the sector for the First Albany Corp., described as "buy a basket
and empty it as the leaders emerge." Over the past year, more and more
investors have begun treating many year-2000 companies as yesterday's
investment fad.
"During 1997, anything associated with the year 2000 got a premium,"
said Stan Corker, director of technology research at Emerald Research, a
Lancaster, Pa., firm whose clients include institutions and mutual funds.
"Now, investors are more concerned with whether these companies will
fall off a cliff on Jan. 1, 2000."
These days, there can be steep price
declines at almost any sign of earnings or
revenue shortfalls. Viasoft is trading at
$4.9375, down from its 52-week high of
$44 last October. Peritus Software
Services, a company that, like Viasoft,
automates the search for year-2000
problems, plummeted late last year and
now trades at $1.09375, down from a
high of $29.125 last October. Data
Dimensions, which hit its 52-week high of
$35.50 a year ago, now trades at $15.125.
And Zitel closed at $3.34375 on Friday.
These and other hard-hit companies are all
associated with the first stages of
year-2000 projects: assessing where the
problems lie and repairing the right
computer code. Although revenues and
earnings grew rapidly at first, they appear
to have peaked sooner -- and at lower
levels -- than Wall Street had expected.
Much corporate spending seems to be going not toward repairs but
toward avoiding the problem by buying new computers and software.
One bright spot has been companies like Compuware that have
emphasized not just their repair capabilities but also so-called
later-stage tools like software for testing completed repairs. Stocks of
companies like Keane Inc., with broader information management skills,
fared better than the Viasofts of the year-2000 universe, but have also
weakened.
Keane, for example, has probably seen its year-2000 business peak at
$102 million, or 37 percent of revenues, in its most recent quarter,
according to Richard Park, a securities analyst at Merrill Lynch. Now
investors may be wondering how quickly its year-2000 work will tail
off and how rapidly it can win new outsourcing contracts and other
business from big corporate computer users. Keane's shares are at
$31.75, down from their peak of $60.9375 on July 8.
"The issue for everyone is whether year 2000 is a long-term source of
leverage with clients or whether it will disappear without a trace," said
Rinaldi of First Albany. He and many others say that year-2000 stocks
will remain volatile but that investors have become too gloomy about
many of them.
He maintains a buy on Keane, and strong buys on
Compuware, Mercury Interactive and Cognicase. "Y2K
has been a catalyst for growth for all of them but it's not
dominant," Rinaldi said.
For its part, Emerald Research maintains buys on Keane
and the Mastech Corp., a leader in outsourcing
remediation work to programmers in India.
Also seeing possibilities in the sector is Thomas Dorsey,
president of Dorsey Wright and Associates, a Richmond
firm that specializes in technical analysis. "The de Jager
index can spring back just as fast as it fell," Dorsey said,
and he recommends that investors buy call options on it.
Major index components that have minor year-2000
exposure, like Unisys and the EMC Corp., are in good
shape, he said, and several others, including Keane, are
"great bottom-fishing plays."
Home | Site Index | Site Search | Forums | Archives |
Marketplace
Quick News | Page One Plus | International | National/N.Y. | Business
| Technology | Science | Sports | Weather | Editorial | Op-Ed | Arts |
Automobiles | Books | Diversions | Job Market | Real Estate | Travel
Help/Feedback | Classifieds | Services | New York Today
Copyright 1998 The New York Times Company |
