Business | Markets
Tech stocks feel worst selloff pain
Investors dump shares on recession fears despite companies' robust earnings.
- Bloomberg
- Published: 00:32 February 16, 2008
New York/London: Microsoft shares have not been as cheap since 1986, the year Bill Gates took what would become the world's largest software maker public. Nokia is trading at its least expensive level since surpassing Motorola as the biggest producer of mobile phones in 1998.
Despite the fastest estimated earnings growth of any US group except banks, technology stocks were hurt the most in the global stock market tumble that sent shares to their worst January in at least three decades. Computer and software-related companies in the MSCI World Index were valued at 20.8 times profit on February 6, the lowest ever and down from 91.1 at the start of the decade.
Earnings from more than two-thirds of technology stocks in the Standard & Poor's 500 Index that have reported fourth-quarter results exceeded projections. Analysts forecast profits at companies from Dell to Intel will grow 24 per cent this year, even as the US economic slowdown threatens to curb demand.
"Valuations are only true if the double-digit earnings growth expectations are true,'' said Carsten Klude, the Hamburg-based head of investment strategies at M.M. Warburg, which oversees $20 billion and sold all of its technology holdings in November, including Espoo, Finland-based Nokia.
"In this challenging economic environment, this is much too optimistic.''
Chain reaction
Cisco Systems spurred a 3.9 per cent drop in S&P 500 technology shares on November 8 after the world's largest maker of computer-networking equipment said weaker demand from banks and carmakers was curbing growth. Last week, Cisco predicted a January slump in US and European sales may last months.
Institutional investors turned sellers of technology shares in December and dumped more on a net basis last month than in any 20-day period since August 2002, according to data from more than 10,000 client funds compiled by Boston-based State Street, the world's largest money manager for institutions.
The MSCI World Information Technology Index dropped 16 per cent this year, the most among 10 industries worldwide, after the US economy grew last quarter at half the pace forecast by economists and the unemployment rate jumped to a two-year high of five per cent in December.
At least $146 billion in asset writedowns and credit losses at the world's largest financial firms added to concern that companies will reduce spending on computer upgrades.
The International Monetary Fund cut its forecast for 2008 global growth to 4.1 per cent last month from the 4.4 per cent rate projected in October.
"If the US economy is going into a recession, which is the fear that has come up since the end of the year, it's hard to imagine tech will escape,'' said Doug Sandler, 37, the Richmond, Virginia-based chief equity strategist at Wach-ovia Securities, which oversees $1.2 trillion.
Wachovia, which at the start of this year held more technology shares than are represented in benchmark indexes, cut its holdings last month and may sell more, Sandler said.
Investors are stepping up sales of technology shares even as earnings from 46 of the 58 S&P 500 technology companies that have reported fourth-quarter results topped estimates, data compiled by Bloomberg show.
Profit outlook
Analysts project technology earnings will advance 24 per cent this year, compared with 26 per cent growth at financial companies, according to a Bloomberg survey.
BlackRock's Kevin Rendino cites the profit outlook as a reason to hold semiconductor stocks.
Rendino, a value investor who buys stocks priced at a discount to their historical average, says shares of Intel, the world's largest chipmaker, already reflect the drag a US recession would have on earnings.
Intel lost 24 per cent of its value this year and trades at 17.5 times profit, 23 per cent below its monthly average over the past two decades. The Santa Clara, California-based company reported fourth-quarter sales that missed analysts' estimates.
"You make money when there's blood on the streets,'' said Rendino, who oversees $15 billion and is senior fund manager of the BlackRock Basic Value Fund in Plainsboro, New Jersey.
Microsoft trades for 15.6 times earnings, the lowest weekly level since the company's initial stock sale on March 13, 1986. The software maker has declined 12 per cent since it offered to buy Sunnyvale, California-based Yahoo on February 1 for $44.6 billion.
Nokia last month traded at 11.2 times reported profit, a 69 per cent discount to the monthly average of 36.3 times earnings since 1995 and the cheapest in that period, data compiled by Bloomberg show. The company, whose shares have fallen 8.1 per cent this year, reported a 44 per cent increase in fourth-quarter profit on January 24.
Harry Lange, who runs the $45 billion Fidelity Magellan Fund, sold his $453 million stake in Canon in December, according to the data from Boston-based Fidelity Investments.
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