THE TECH WASTELAND
What Now?
It's been seven months since market gurus pronounced big-cap tech shares ready to surge. We didn't love the sector then--and it doesn't look much better now.
FORTUNE
Monday, May 27, 2002
By David Stires
You might think the recent technology rally is a harbinger of good things to come for this battered sector. After Cisco Systems beat analysts' quarterly earnings estimate by two cents earlier this month--wahoo!--the bull was back. The Nasdaq shot up nearly 8%, its biggest one-day gain in more than a year.
But hang on. Weren't we in this situation all too recently--say, last fall? Back then, many execs from tech bellwethers were reassuring investors that earnings would not be derailed by the terrorist attacks. Their stocks were surging from their Sept. 21 troughs, and many market watchers speculated that tech mania had returned.
We didn't buy it. "This is not the time to be overweight in tech," we wrote in The (Still) Dirty Dozen, a story on 12 of the most widely held technology stocks (October 29, 2001). We noted that given anemic corporate spending, shrinking margins, and precipitously high valuations, the risks of owning those stocks far outweighed the potential rewards. We recommended selling six of the 12 stocks, holding four and buying just two.
Many of the calls were prescient. Three of our six sells--Sun, EMC, and Nortel--have tumbled between 30% and 50%. Cisco Systems, another one we said to dump, is flat after falling nearly 20%. And though Hewlett-Packard, now freshly combined with Compaq, is up slightly, we still don't like it.
We also made some bad calls. We should have advised selling IBM and Oracle, rather than holding them; both have fallen sharply. And we certainly shouldn't have recommended buying Lucent at $7. It's now at $4. Yes, a doozy of a miss.
How did the portfolio do overall? Put it this way: If you had $30,000 distributed evenly among the 12 stocks ($2,500 in each) on Oct. 11 and had held all of them, you would now have $25,216. That's a loss of $4,784 or 16%. But if you had followed our advice and put the money from the stocks you sold into a money-market fund earning 2% a year, you would now have $28,003, a loss of 6.7%. (For the record, if you had shorted the six stocks we said to sell--something we didn't suggest to do--you'd have profited slightly, with a kitty of $30,439.) No, we won't expect many thank you letters.
Trends in Tech
On the Bright Side
• Revenue growth Cisco's upbeat earnings report buoyed hopes that corporate spending may finally turn.
• Cash Microsoft can use its $40 billion to fund R&D, pay a dividend--or just generate more cash.
On the Dark Side
• Debt Companies like Nortel are drowning in it. Despite cost cutting, cash flow remains negative.
• Eroding margins Intense competition has cut EMC's margins from 60% to 37% in two years. It's not alone.
Update: Our Calls, Seven Months Later
Company
Ticker
Price
10/11/01
FORTUNE said
Price
5/8/02
How our stock predictions fared
Cisco
CSCO
$16
SELL
$16
Even. Stock fell, then surged. Still pricey.
Dell
DELL
$25
HOLD
$25
As we said, PC king needs new growth.
EMC
EMC
$13
SELL
$8
Spot on. Margins fell more than expected.
HP
HWP
$18
SELL
$20*
Guessed wrong. Carly won--but we still hate the HP-Compaq combo.
Compaq
CPQ
$10
SELL
--
IBM
IBM
$99
HOLD
$80
A miss. IBM's unusual warning hit the stock.
Intel
INTC
$25
HOLD
$28
Good call, thanks to the chip rally.
Lucent
LU
$7
BUY
$4
It seemed to us too cheap to tumble. Wrong.
Microsoft
MSFT
$57
BUY
$52
Whoops. It jumped, but couldn't sustain the rise.
Nortel
NT
$6
SELL
$3
We were on the mark. Debt keeps mounting.
Oracle
ORCL
$15
HOLD
$8
Oops. Biz under assault by big-name rivals.
Sun
SUNW
$10
SELL
$7
Nice one. Struggling clients out of dough.
*Reflects stock price of new Hewlett-Packard after its merger with Compaq. The new ticker is HPQ
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mfg,airest
