Tech: Why nobody's buying

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    Tech: Why nobody's buying

    The fundamentals are getting better but fund managers are scared stiff.
    May 29, 2002: 6:04 PM EDT
    By Paul R. La Monica, CNN/Money Staff Writer

    NEW YORK (CNN/Money) - Could the current tech downturn be a buying opportunity? Well, if you're thinking of buying, be afraid. Very afraid. The guys on the front lines certainly are.

    Curt Rohrman, manager of the USAA Science and Technology Fund, says he has made only a couple of small additions to his fund lately. The Jensen Fund, a large cap growth fund, owns only one tech name: Adobe -- and managers Robert Zagunis and Bob Millen say they haven't bought more during the recent down draft.

    Jaye Morency, manger of the DLB Tech Fund, says that even though she thinks corporate tech spending will pick up in the fourth quarter, she's not buying just yet because she sees few catalysts that could kick stocks higher. Morency adds that other funds in the DLB fund family are also steering clear.

    And even long-term bulls aren't buying. Kevin Landis, chief investment officer for Firsthand Funds, a mutual fund family based in Palo Alto that focuses primarily on the technology sector, says that his funds are fully invested.

    "Given that the whole world is not rushing to buy technology mutual funds right now, we'd have to sell something to buy something. For the most part our bets are down," says Landis.

    Waiting for a catalyst
    Add all that up and it gets increasingly difficult to make a case for an end to the pain. Even though earnings growth for technology companies is expected to be fairly robust this year (see more on the earnings recovery), fund managers are holding back.

    "At some point we should be buying before the fourth quarter. But it's a long time to hold these stocks. Every little rally you get is a hope that the recovery has begun and every sell off is the market saying 'not yet'," says Morency.

    Valuation is another issue. Zagunis and Millen say that a few tech blue chips, including Intel (INTC: Research, Estimates), Microsoft (MSFT: Research, Estimates) and Cisco (CSCO: Research, Estimates) pass rigorous tests when it comes to the fundamentals. But they haven't been buying because the stocks seem too pricey.

    And the lack of positive news from technology companies will make it tough to sustain any rally. "Nobody is going to have the nerve to be aggressive," Rohrman says. "We're still in a momentum market -- it just happens to be downward momentum."

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    Simply put, the environment for technology is still murky at best. Take the latest news from Novellus Systems (NVLS: Research, Estimates), a leading manufacturer of chip equipment. In a conference call after the closing bell on Tuesday (see more), Novellus raised its bookings, shipments and earnings forecast for the second quarter. But the company did not talk about the second half of the year, and its stock plunged more than 7 percent Wednesday taking much of tech with it.

    It just goes to show that technology investors aren't sure which way to turn. Or to quote "All Along the Watchtower" by Bob Dylan, "There's too much confusion. I can't get no relief."

    Expectations are still too high
    Rohrman says he thinks one problem is that -- surprisingly -- expectations are still too high. Novellus announced during its conference call that bookings should be $275 million for the second quarter, $25 million higher than guidance given on April 15. But Rohrman says some investors were expecting between $285 million and $300 million.

    Zagunis says a major reason his fund has shied away from technology and continues to do so is because expectations are often vastly different than what winds up happening. "Most analysts project what the earnings growth rates are going to be and they tend to be too aggressive for our blood," he says.

    Another problem, Morency says, is that the third quarter is traditionally weak. For this reason, she says Intel's mid-quarter update on June 6 is crucial. She says if the company doesn't provide any strong evidence of improvements in its PC business for the second quarter, it's probably safe to assume that the third quarter will be weak as well.

    Interestingly though, one non-tech fund manager is taking advantage of the volatility and beginning to search for bargains. James McGlynn, manager of the large value fund Summit Everest, says he recently bought shares of Lucent (LU: Research, Estimates) and AT&T Wireless (AWE: Research, Estimates), which he calls a good value under $10 a share. (It is currently trading at about $8.)

    Technology stocks are still a relatively small part of McGlynn's portfolio, accounting for just 7 percent of the fund's assets. But that's up from about a 5 percent weighting earlier in the year.

    McGlynn says he's looking only at companies that have been really beaten up and could now be turnaround stories as opposed to stronger players whose stocks have plunged but are surviving and taking market share from weaker competitors. He points out that most technology companies have yet to benefit from stronger demand.

    "I don't want to get wildly enthusiastic. So many firms are making their numbers only by cutting expenditures," he says.

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