Rebound for ‘Over-Owned’ Techs Looks Elusive
“Don’t fight the tape!” is one of the oldest admonishments on Wall Street, and it has been by far the best advice for technology stock investors since September.
The layman’s translation is simply this: When a stock is moving powerfully--up or down--just go with the flow; don’t battle it.
When tech shares were in a meteoric rise last spring and summer, no amount of reasoning could persuade eager buyers that they were overpaying for what are perpetually high-risk businesses.
Now, the continuing collapse of many tech issues seems as grossly overdone as their run-up, yet the stocks can’t find a bottom.
What’s more, bargain hunters should realize that history argues against any meaningful turnaround at all in the near future for the most battered stocks. Recovery typically is a multiyear process, an eternity on Wall Street.
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Is the outlook for the computer business fading drastically? Is that what tech shares’ dramatic fall from grace is all about?
Maybe. But some analysts view the tech sector’s principal problem as more technical in nature than fundamental. This may be a classic case of an industry becoming over-owned on Wall Street: By last fall, so many investors had loaded up with tech that there were literally few potential new buyers left.
When, for whatever reason, that army of investors began to sense that the stocks might be peaking, their shift in sentiment was almost guaranteed to become self-fulfilling. If someone yells “Fire!” in a full theater, it doesn’t matter whether there is a fire--everyone knows what will ensue.
One measure of how extensive tech-stock ownership had become is that it was difficult to find a stock mutual fund that wasn’t substantially invested in the sector by late summer, as the hype over the Internet and technology in general spawned a mania for the shares.
Marc Klee, manager of the John Hancock Global Technology stock fund in Garden City, N.Y., notes that the new “champions” of tech investing were money managers who weren’t specialists in the field but whose financial resources vastly exceeded those of the funds that were specialists.
The Fidelity Magellan stock fund, the nation’s biggest mutual fund ($53 billion as of Sept. 30), had more than 40% of its assets in tech stocks early last fall. That worked out to about $21 billion in tech for Magellan alone.
By contrast, the assets of the 36 stock funds that specifically focus on technology totaled a mere $14.3 billion last fall, according to fund-tracker Lipper Analytical Services.
Small wonder that when Magellan manager Jeff Vinik began to bail out of certain tech shares last October, the selling pressure in the sector soon became overwhelming.
Micron Technology, a leading maker of computer memory chips, saw its shares zoom from $21.25 early in 1995 to $94.75 by September, as demand for chips exceeded supply worldwide for much of the year and analysts predicted exponential earnings gains for Micron.
Today, Micron’s stock is at $39.125, a 59% decline from its peak, and it still isn’t showing signs of bottoming. Phil Erlanger Research, an Acton, Mass.-based market analysis firm, rates the entire semiconductor stock group 139th of 139 industries it tracks for near-term investment potential.
Of course, the great reversal in the chip stocks had to have a trigger, and as usual that trigger was a change in the fundamentals.
By September some industry experts began to question whether the demand-supply equation for chips would continue to so heavily favor the suppliers. Even if demand remained robust, it seemed likely that production of memory chips would increase sharply as producers in America and abroad squeezed more out of existing plants to feed the booming market.
Slowly, analysts recognized signs that the supply crunch was easing, and they began to shave earnings estimates for Micron and other chip firms. By mid-December, Micron itself admitted that it was experiencing a “modest” decline in chip prices.
Richard Whittington, semiconductor analyst at SoundView Financial in Stamford, Conn., and an influential cheerleader for the stocks last fall, now concedes that he and other analysts were “shocked” by how abruptly chip supply caught up with demand. He blames, in part, chip company executives. “They have not been open in their dialogue with Wall Street,” Whittington contends.
Yet he still sees Micron earning between $5 and $6 a share this year, which at a minimum would be a 27% increase from the $3.95 earned in 1995. Unless he’s too optimistic, wouldn’t a 27% earnings gain attract investors?
For semiconductor stocks and many (but certainly not all) other tech shares, the painful reality is that it may be very difficult to restore upward momentum soon.
Once a sector becomes grossly over-owned, and those owners begin to fear that the tide has turned against them, the urge to sell becomes almost primal. The relative few potential buyers in the market, recognizing this, see no urgency to enter. The result is continuing price erosion.
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That was the story with big-name drug stocks in the early-1990s. After a long run-up that made the stocks Wall Street darlings, their prices peaked in January 1992. As their earnings weakened and fear of federal health-care reform gripped the shares, the stocks’ prices declined for two full years.
Dennis Jarrett, a technical analyst at Jarrett Investment Research in New York, notes that “once the hemorrhaging [selling] is over, you need to repair investors’ psyche,” which adds to the time it takes to bring investors back to a stock group that burned them.
What’s particularly problematic for many tech stocks now is that fund managers who normally would pay close attention to the fundamentals are instead focusing more on the stocks’ moves, and are becoming more nervous as they do.
“I’ve been spending a lot of time looking at the charts,” concedes Dan Leonard, manager of the Invesco Technology stock fund.
Patient investors know that the time to buy high-quality stocks is when others are evacuating in a panic. What’s important to remember, however, is that the shakeout process for over-owned stocks can take years to run its course.
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When Love Turns to Revulsion
When a stock peaks after a substantial climb, history shows that it can take a long time to shake out sellers and allow the price to bottom. Case in point: Shares of drug giant Merck & Co. peaked in January 1992 and took two years to finally bottom. Some analysts fear a similar shakeout period for semiconductor firm Micron Technology, which topped out last fall. Quarterly highs, except latest:
Micron (Friday): $39.13
Merck (Friday): $63.00
Source: TradeLine
