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Tech Stocks on a Roll; How Long Will It Last?

Outlook: Investors see encouraging signs, but many analysts say shares probably will fall back.

January 04, 2002|JOSEPH MENN | TIMES STAFF WRITER

Technology stocks powered the Nasdaq index to its biggest gain in nearly a month Thursday as investors were encouraged by reports of increased demand for microprocessors and higher prices for memory components.

Analysts said the news strengthened their belief that the economy bottomed in the third quarter of last year, but many warned that the prices of many tech stocks are getting too far ahead of profit expectations, and probably will fall back in the coming weeks.

Investors were buoyed Thursday by analysts' positive comments on top microprocessor maker Intel Corp., electronic storage leader EMC Corp. and other tech companies. In addition, a survey by Merrill Lynch & Co. showed that chief information officers at big companies in the U.S. and Europe expect to spend 3% more on technology products and services this year.

Just a month ago, the same survey found that spending would remain at 2001 levels.

Chip stocks were among the biggest gainers Thursday, with the Philadelphia semiconductor index--known as the SOX--jumping 8.3% to its highest level since August. The technology-focused Nasdaq composite index climbed back over the 2,000 mark for the first time in more than two weeks, rising 3.3%, or 65.02 points, to 2,044.27. Nasdaq last notched a bigger one-day gain Dec. 5, when it rose 4.3%.

It was the second straight robust day for tech stocks. On Wednesday, a trade group reported that chip revenue rose for the second month in a row. And South Korea's Hynix Semiconductor Inc., the third-largest memory maker, raised its long-term contract prices by 30% as a supply glut eased.

Contributing to investors' enthusiasm is the lack of profit warnings from companies that are about to disclose fourth-quarter results.

"We're in a pre-announcement season, and it's been fairly tame so far," said J.P. Morgan computer analyst Daniel Kunstler. "We might have a little bit of upside in terms of expectations."

In the Merrill Lynch survey, executives said they would spend the most money on storage and software, especially security and large-enterprise programs. The companies most likely to see increased business, according to the survey, are Microsoft Corp., Cisco Systems Inc., Compaq Computer Corp. and IBM Corp.

Several investors and analysts sounded a note of caution, saying that share prices are rising for emotional reasons that exaggerate the recent good news and the import of studies pinpointing the economic bottom as the third quarter.

"A lot of people are feeling safer," said Merrill technology investment strategist John Roy. "The fundamentals certainly aren't there to support the techs."

Roy and others predict a stock-price correction in the next few weeks or months.

Among other things, skeptics say, competition and excess manufacturing capacity will make it harder to turn increased sales of computers, chips and other gear into significant increases in profits.

"My belief is the stocks are a little bit ahead of the fundamentals," said Morgan Stanley analyst Mark Edelstone. "The rate of recovery is going to be relatively slow."

Indeed, some investors are taking the rally as an opportunity to reduce their holdings. Brinson Partners Inc. of Chicago is among those selling some semiconductor shares, said Brinson portfolio manager Michael Nell. The firm owns stock in Advanced Micro Devices Inc. and Analog Devices Inc.

"It's good that we're forming a fundamental bottom in terms of year-over-year comparisons, but we don't think that many opportunities are out there in terms of stock valuations," Nell said.

Although Nasdaq remains far below its peak of March 2000, price-to-earnings ratios still are high by historical standards.

Intel ended Thursday's trading at more than 46 times its last year's earnings.

Intel jumped $2.52 to $35.52, or 7.6%, after J.P. Morgan analyst Eric Chen said December demand for its chips grew. Competitor AMD gained 18% after similar comments by another analyst.

Although many investment professionals predict the rally won't last, the early run-up suggests that tech stocks will remain among the most volatile issues in 2002.

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