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How low can techs go?
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April 4, 2000: 10:40 a.m. ET
Tech stocks may be battered, but don't count them out -- not just yet
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - All good things must come to an end - at least for a little while.
That's what some market observers are saying about the drubbing that technology stocks have taken recently.
The sector, which charged into the first quarter with unprecedented gains, took a turn for the worse on Monday, tumbling almost 350 points. And some expect it to get even worse before it gets better.
At the close of trading on Monday, the technology-laden Nasdaq composite index stood at 4223.68, 16 percent below its high of 5,048.62, reached earlier in the month, putting it well into what Wall Street deems a market correction.
A ridiculous month
Although bearish comments from some high-profile market pundits were credited in large part for sparking last week's sell-off, and Monday's drop was triggered by the failure of settlement talks in the government's antitrust lawsuit against Microsoft (MSFT: Research, Estimates), many market watchers agreed that a number of technology stocks, particularly dot.coms, have soared well beyond what can be considered reasonable price levels.
"Everybody on Wall Street knew how ridiculous the month of February was, but we still had to be in it," said Scott Bleier, market strategist at Prime Charter. "We asked ourselves, 'Are these things justified by any measure of valuation?' The answer is, unequivocally 'No.' But you have to participate in order to make money for your clients."
 Even with its recent losses, the Nasdaq is up more than 2 percent year-to-date. And technology stocks, particularly Internet and semiconductor-related issues, have been some of the biggest contributors to that rise.
The run-up was attributed in large part to investors shifting their assets into so-called "new economy" companies, which are driven by advances in technology and electronic commerce.
But some institutional investors now are reevaluating their technology positions, which could knock even more of the air out of the high-flying sector in the weeks to come.
In an interview on CNN's Moneyline News Hour, Thomas Madden, chief investment officer at Federated Investors, characterized the recent decline in technology as a healthy sign for the market, considering the excessive valuations.
Madden, who manages $23 billion in assets, said institutional buyers appear to be looking now at how old-line companies will benefit from the developments in technology, and he expects the shift in assets to continue for some time.
What's old is new again
"Investors are beginning to think harder about how `old economy' names like Ford (F: Research, Estimates) and Home Depot (HD: Research, Estimates) are going to use this technology to change the way businesses work and make better margins and profits in coming years," Madden said. "So the opportunity will be more clearly perceived in the old economy and fueled by taking gains from new economy stocks."
For individual investors, the recent market dip offers a good buying opportunity, but they should be very careful about the names they add to their portfolios in the current market environment, experts say.
In addition to the high-flying Internet stocks, some of which have yet to turn a profit and were driven to dizzying heights largely by speculation, companies with long histories of profit growth and proven management have been knocked down a few pegs as well.
"For people who are not as daring as the momentum investors who have driven some of these Internet stocks to unbelievable heights, I would advise that they stick with more conservative "brick-to-click" type stocks like IBM (IBM: Research, Estimates), Dell (DELL: Research, Estimates), Hewlett-Packard (HWP: Research, Estimates) and Microsoft, established companies that make real profits," said Ulric Weil, technology analyst at Friedman Billings Ramsey & Co.
"They are all proven players, and they are all profitable now," Weil added. They don't have infinite P/E multiples as most of the Internet stocks do, so that might be a safer way to play technology in this environment."
The siren song of the Web
Even though the dot.com segment has lost some of its luster and there are an increasing number of market experts growing dubious of its potential for further growth, investors still may cash in on the promise of the Internet, according to Prime Charter's Bleier.
But instead of putting money into traditional dot.coms, he suggests that investors look at the companies that are involved in building out the Internet infrastructure as well as those engaged in business-to-business electronic commerce. 
"Those are the segments that have the most powerful organic growth going forward for the next two to three years, minimum," Bleier said. "You have to steer clear of the very highly-speculative small-cap technology names, those stocks that have been around for a long time and have reinvented themselves over the last year as Internet companies."
The growing consensus on Wall Street seems to be that technology stocks and the Nasdaq will continue to be volatile as the valuations of some of these stocks come down to a level that is in parity with the broader market.
"The correction looks scary, scarier than anything we've ever seen," Bleier said. "But it is in direct proportion to the move up. There will continue to be momentum-oriented moves, but for the most part, I think that Nasdaq is in the process of digesting incredible gains and hammering out a consolidation range."
The volatility is likely to continue through the summer, which also is the slow time for capital spending in the technology sector, Bleier added.
"This is not yet the end," said Friedman Billings Ramsey's Weil.
"It's another one of those more serious contraction phases that are followed by buying on the dip," Weil added. "I don't think the catalysts are there yet to sink the ship. I'm still on the side of the angels, although I recognize that we can easily have a 15 percent correction here." 
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