Value Makes a comeback - Mar. 12, 2001

Value makes a comeback

March 12, 2001: 2:51 p.m. ET

In retrospect, making sense of the 3,000-point difference a year makes
By Lisa Meyer

SAN FRANCISCO (Red Herring) - It has happened before. Twelve times in the last 17 years, the Nasdaq has been oversold from a technical standpoint, analysts say.

So why is everybody so surprised?

Of course, the shock has to do with the fact that the drop was so quick and steep. Last March, the Nasdaq reached a heyday of 5,048.62. And on Friday, one day before the anniversary of that peak, the Nasdaq stood at 2,052.78, 59 percent lower than its all-time high.

Needless to say, most investors feel burned. But those who don't know the past are condemned to repeat it, philosopher George Santayana once said.

Abnormal psychology
Over the years, technological innovations have always brought opportunities for new ways of doing business, which in turn create chances for greater wealth. Initially, many investments in the wake of technological changes are speculative, based more on hype than on any tangible statistics. Indeed, this past year, investors acted like drunks at a party, disregarding skyrocketing valuations that lacked the revenue to back them up.

"We left fundamentals, and only momentum began driving up the stocks," says Daniel Peris, a senior analyst at Argus Research Corp. "The binge had very little to do with economics. Investors were playing a very dangerous game."

The runup was driven more by psychology than anything else, Mr. Peris adds. Now a shift in investor psychology is keeping the market down. Granted, the parade of layoffs, warnings, and poor earnings reports isn't helping. But analysts say the main reason for the shift is that investors got too burned, and as a result they are hesitant to keep money in technology stocks for long stretches of time.

"A significant Nasdaq rally will be difficult," says Mr. Peris. "Those who were burned in the dive will see a $5 stock go up to $9 and then get out. Today's tough investing environment is in some ways distinct from what is actually happening in the economy."

A year ago, the Internet was everything for some investors. Now many regard it as nothing. The change in sentiment has been like day and night, but neither view is right.

"The truth is somewhere in between," says Michael Sandifer, a member of the investment committee for Amerindo Investment Advisors, a mutual fund firm. "But it is indeed investor sentiment -- the uniformity of opinion -- that makes highs and lows."

Face forward
Basically, investors must reset their expectations. Analysts agree that market conditions will improve eventually, but the climb back up will happen more slowly. And investors aren't the only ones who need to revise their outlook. Companies need to establish more reasonable benchmarks for growth and become wiser about how they spend their money.

So what companies will help bring technology stocks out of their year-long funk? Some analysts believe that instead of looking for hot sectors or emerging upstarts, the safest way to play a recovery will be with established technology companies. "The leading companies will lead the Nasdaq out of its current slump," says Mr. Peris. "It won't be the Doubleclicks (Nasdaq: DCLK), but the Oracles (Nasdaq: ORCL), Ciscos (Nasdaq: CSCO), and Sun Microsystems (Nasdaq: SUNW)."


		Since March 10, 2000, Oracle and Sun Microsystems have fallen 57 percent, while Cisco has dropped 67 percent. Such plunges have given these companies more attractive valuations.

Indeed, many of the large technology companies have deep enough pockets to withstand a prolonged slowdown. And because of their clout, they should continue to gain market share. Despite the Nasdaq's fall, we would argue that advances in technology are responsible for continued innovation and changes in the economy. In the coming years, an increasing percentage of computing will be done through the Internet. The majority of communication will be via data rather than voice, and a growing percentage of economic activity will be transacted over the Internet.

Keeping that in mind, we think that long-term investments in leading companies like Oracle, Cisco Systems, and Sun Microsystems, for example, still make sense. That's not to say that these companies aren't struggling during the current downturn. Even they haven't escaped the bite of the slowing economy. But with strong franchises priced at more reasonable levels, these companies now appear to be good buys for the patient investor.

Since March 10, 2000, Oracle and Sun Microsystems have fallen 57 percent, while Cisco has dropped 67 percent. Such plunges have given these companies more attractive valuations. Cisco is currently trading 36 times its estimated 2001 earnings, and analysts project that earnings should increase at an average of 30 percent annually over the next three to five years. Oracle and Sun are trading at 37 and 40 times 2001 estimates, respectively, and both companies have long-term estimated growth rates of 25 percent.

But blue-chip market leaders are not the only technology stocks that should make money for investors. Mr. Peris says that short-term investors might also want to take a closer look at certain services companies that have performed well as of late.

Financial data provider Factset (NYSE: FDS) and technology solutions provider Unisys (NYSE: UIS) have weathered the technology dive well. Factset's stock is actually up 3.8 percent since March 10, 2000. Unisys stock is down 39 percent in the last year, but in the last six months, it has climbed 25 percent. The Nasdaq, meanwhile, has plunged 46 percent during the same time frame. Unisys is quite inexpensive, trading at 13 times estimated 2001 earnings. Factset is trading at a 2001 P/E multiple of 34, and earnings are expected to increase by 25 percent in 2001.

So even though the technology sector may be in bad shape, investors need to remember that it's been bad before. And what goes down has, in the past, gone back up.

According to Mr. Sandifer, following each of the oversold periods in the past, the Nasdaq has increased in the range of 35 to 260 percent, and such rallies have lasted from six months to a period of several years. In that regard, let's hope that history does in fact repeat itself.