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Capital Spending Slump Drags Tech, Telecom Lower

Securities: The sectors still have more negatives than positives, analysts say. Lucent Technologies and Nortel Networks now trade at less than $1 per share.


A new wave of heavy selling is driving major technology and telecom stocks to multiyear lows, dashing hopes that the bottom finally has been reached in the sectors.

On Wednesday, stocks including Lucent Technologies Inc., Nortel Networks Corp., EMC Corp. and Advanced Micro Devices Inc. fell to new lows in active trading, with former high-fliers Lucent and Nortel now fetching less than $1 a share. Others, including Intel Corp. and Sun Microsystems Inc., touched new lows before rallying back slightly with the broad market.

Analysts say the continuing poor fundamentals for tech--especially the plunge in capital spending by businesses--are driving more investors to give up hope of a rebound in the shares.

"Tech remains a wasteland," said Erik Gustafson, manager of Liberty Growth Stock fund in Chicago. "It's awful across the spectrum because companies simply are not spending on technology. If anything, they're still cutting back."

Late Wednesday, computer services giant Electronic Data Systems slashed its outlook for third-quarter earnings, saying client spending has crumbled.

Lucent last week gave a bearish forecast, Oracle Corp.'s earnings report Tuesday was dismal, and Cisco Systems Inc. said Wednesday that its order backlog on Sept. 9 was 30% below year-earlier levels.

Also Wednesday, brokerage Salomon Smith Barney cut the tech sector to "underweight" from "market weight," saying "we see little reason for investors to think the bad news is over with."

Corporate managers will need to see evidence of a lasting profit recovery before committing to significant capital expenditures, and that may not occur until the second quarter of 2003, Salomon investment strategist Tobias Levkovich said.

Tech stocks' inability to mount a sustained rally also is a reminder of the so-called technical factors working against them--especially the huge number of shares bought at higher prices, known as "overhead supply."

"One reason recovery can take so long is that virtually every shareholder is underwater," said John Bollinger, head of Bollinger Capital Management Inc. in Manhattan Beach.

Lucent, for instance, which topped $63 in late 1999, is still among the more widely held stocks in America, Bollinger said.

"Many people aren't going to wait to get whole on these former market leaders," Bollinger said. "They're going to use any bounce as a reason to get out, or they may finally just sell out of disgust. They don't want to see [the stocks] on their statement anymore."

With the tech-heavy Nasdaq composite index down 75% from its March 2000 peak, some investors are sitting on breathtaking losses.

Many portfolio managers say they are reluctant to fight tech's downward momentum, despite the possibility that some stocks are long-term bargains. "It's like trying to catch a falling knife. With some of these stocks I don't know where the bottom is," said John Rutledge, manager of Evergreen Technology Fund in Boston.

Many pros say investors still banking on the market's former leaders are likely to be disappointed.

"Investors have to be very cautious when it comes to traditional technology companies," Rutledge said. He said he likes service-oriented companies, such as First Data Corp., that aren't dependent on capital spending.

But EDS' warning Wednesday showed that even service firms may be vulnerable.

Gustafson said one tech-related sector with healthy fundamentals is defense. He said companies such as L-3 Communications Holdings Inc. can thrive in an era of "heightened global tension."

But for the most downtrodden tech names, survival may be a struggle, analysts say.

Lucent and Nortel, for example, could get delisting warnings from the New York Stock Exchange if their average closing prices are below $1 for 30 consecutive trading days, according to the Big Board's rules. Rutledge said some hard-hit tech and telecom firms may follow AT&T Corp.'s recent lead and propose reverse stock splits to boost stock prices.



Tech Meltdown Continues

Leading technology shares have sunk anew in recent weeks, deepening their losses in the long bear market. A sampling:

Wednesday Wednesday Percentage change: Stock close change 2000 2001 2002

Cisco Systems $12.29 -$0.25 -29% -53% -32%

Texas Instruments 17.61 -0.39 -2 -41 -37

Oracle 8.32 -0.71 +4 -52 -40

Intel 15.28 -0.29 -27 +5 -51

Advanced Micro 6.78 -0.05 -5 +15 -57

EMC 5.40 -0.46 +22 -79 -60

Sun Microsystems 3.00 -0.04 -28 -56 -76

Lucent Technologies 0.94 -0.06 -81 -53 -82

Nortel Networks 0.81 -0.07 -37 -77 -89

Vitesse Semiconductors 1.15 -0.08 +5 -78 -91

Source: Bloomberg News

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