Friday, February 8, 2008

Tech Holds On (barely)

The fingers of Tech are desperately grasping the edge of the cliff while the economy stomps on its hands. Obviously, the news coming out of Tech recently has not been sunny. Since November, NASDAQ has declined 19.3%, the 20% decline mark usually is considered the official start of a bear market. The reports released during the past couple of weeks have only increased the pain. Infineon cut its earnings forecast causing the stock to drop 14%. Alcatel / Lucent projected more losses and cut its dividend. Google missed expectations causing the lofty stock to drop to near $500. Dell has been shedding jobs as their stock has dropped. Motorola has been struggling and many investors are wondering if the company will be broken up. Intel warned in mid-January. Cisco lowered its guidance for the April quarter in their conference call causing the stock to trade down to $21.25 in after-hours.

The continuing misery has driven Tech investors to seek safety while providing entertainment with illuminating headlines such as Some Analysts See Microsoft As Safe Bet. “Any Tech stock that is going to drop less than other tech stocks must be a good investment, eh.”

Certainly the situation for the first half of 2008 is looking bleak. The HingeFire January survey showed that over 42% of the respondents expected Tech to drop by more than five percent in the first quarter. However at some point investors need to ask if all the bad news has been priced into these stocks. Despite the news from Cisco Wednesday evening, CSCO stock rose in the market by the end of Thursday. Many fundamental investors would point to this as a very positive occurrence in regards to the news, arguing that the price rise demonstrates the strength of the stock and overall tech sector. Technical analysts would simply state that the market was oversold from several days of previous selling and the upside day merely represents a dead cat bounce.

Shares of Cisco have declined 32.3% since November; at some point the valuation will appear to be attractive and buying will start. Certainly there is the possibility of some downside left, most quantitative and technical models show Cisco dropping below $20 in the upcoming months. However if the long term outlook is still for 15% to 17% growth then these prices may represent an opportunity to get some shares at attractive valuations for investors with timeframes over three years. Other large-cap tech stocks are in a similar situation.

Certainly the charts (Charts: The Bad and the Ugly) show that Tech will likely experience some further downside as the market hunts for a bottom. Earlier projections from late October (Quiz: What won’t hold $30) have been right on the money in some scenarios. The question remains if it is time to start hunting for a market bottom in Tech? An initial evaluation shows that any type of bottom may still be several weeks away.