Dream on. Sure, tech stocks raised their skirts and danced last month. Since mid-April, they’ve gained 30 percent or more.
But that gets investors just partway up the basement stairs. If you bought Cisco at its high, the stock has to rise a further 300 percent for you to break even on the trade. Are we ready to clap hands and believe–again–that the company will grow by 30 to 50 percent forever? Not likely.
I hate to break this to besotted believers, but Cisco is an actual company, not just a famous stock (hats off to SatireWire.com for noticing). It makes routers and switches, whatever those are. For a while Cisco sold them by the boatload to anyone who needed routing and switching. When business slowed, it lent money to customers so they could buy. When those customers failed, it lost the money and the future sales, too. Earlier this month, Cisco wrote off $2.2 billion in unsold hardware as entirely worthless.
Until last year, investors behaved as if the big techs like Cisco had an unlimited market for any product they sold. Instead, they’ve turned out to be just another group of manufacturing stocks. Earnings rise and fall, as the economy does. “You tell me why Cisco shouldn’t be priced like Caterpillar or General Motors,” argues analyst James Bianco of Bianco Research in Barrington, Ill.
Stock huggers: So far, investors have hugged their tech stocks during the entire wipeout. What’s more, they kept most of their shares in the aggressive-growth mutual funds that specialize in techs. Bianco estimates that fund investors are holding on to unrealized losses in the $80 billion range. For you to break even, he says, the Nasdaq would have to rise to 3600 from 2199 last week.
The question for tech investors today is whether to stick with their stocks and aggressive funds or lighten up. The arguments:
“Historically, bubbles don’t pop and reinflate,” says James Stack, of InvesTech Research, in Whitefish, Mont. When the tech boom of the late 1960s went bust in 1970, many of those stocks didn’t hit their final bottom until 1974. If the Nasdaq rose 15 percent a year from its recent low, it would take a long eight years to reach its March 2000 high.
Ten years ago, when techs were underperforming the general market, “I couldn’t persuade people to buy them,” Hickey says. “Now I can’t beat them off with a stick.”
Eric Gerster, analyst for the T. Rowe Price Technology Fund, agrees that “the fundamentals stink.” There’s still too much hardware around, and too few customers.
But Gerster runs money that has to be put to work, and his story is software. Corporations are shifting their infrastructure to the Internet. That implies high growth for companies that develop programs for Net security, management systems and database tech. He’s looking for “emerging leaders”–and, of course, so is everyone else. You’re not likely to find them before Gerster does. Neither of you is likely to buy them cheap.
You’re supposed to “rebalance” your investments from time to time–selling stuff that’s hot and reinvesting the proceeds in sectors that fell behind. By this rule, you’d have sold some (not all) of your tech and aggressive growth funds from 1999-2000, as the mania unfolded, and switched into “value” stocks or funds.
Value funds buy stocks that look cheap, relative to a company’s earnings and intrinsic worth. Lately they have avoided tech, and the strategy has paid off. As a group, the value stocks in Standard & Poor’s 500 Index held firm during the past 12 months, while the growth stocks lost 26 percent. If you’d made the switch, you’d have escaped with profits to burn.
Financial planner Harold Evensky, of Coral Gables, Fla., hates the techs. Nevertheless, he’s buying some of them today. “That’s the nature of rebalancing,” he says. “I’m selling high and buying low, but I always feel lousy when I do it.”
Analyst Steve Leuthold, of the Leuthold Group, in Minneapolis, thinks techs will back and fill for a couple of years. Different stocks will lead the new bull market up. Still, he put some money into semiconductor equipment, to be ready when the turn in tech occurs.
As for burned investors–they may not be dumping their busted techs but neither are they risking much new money there. AMG Data reports that a modest $1.4 billion moved into U.S. stock funds last week–mostly into traditional growth funds, not the techs.
