The Dow may be down only 10 percent from its 52-week high, but the Nasdaq is in the middle of a
screaming bear market, down nearly 50 percent from its high in March. Computer stocks have been
among the hardest hit, particularly PC makers: Compaq is down 34 percent from its peak, Dell is off
68 percent and Gateway, 76 percent.
The weakness extends down the food chain. Intel, which counts on PC makers for a large slice of its
semiconductor sales, has lost 56 percent. And
Applied Materials, the leading
producer of semiconductor equipment, is off 66 percent.
I don't believe that the outlook for these stocks is nearly as bleak as their recent performance
suggests. It's true that the crucial fourth-quarter season isn't looking very bright. And the most
pessimistic analysts argue that PCs are becoming like television sets -- commodities distinguished
only by price. Without the ability to charge premium prices for added bells and whistles, the
thinking goes, already-thin profit margins will deteriorate even more. But over the next five
years, sales for top companies in the PC sector are projected to grow 12 percent to 15 percent
annually, and earnings could rise 16 percent to 20 percent or more.
The next few months may be trying, but they should offer investors great long-term buying
opportunities. And the best one, to my mind, figures to be Applied Materials, which is capable of
growing profits an average of 25 percent a year.
The stock's big drawback is its extraordinary volatility. Even when it looks cheap, it's capable of
falling further if the technology sector is doing poorly. And since two-thirds of sales come from
overseas, Applied Materials is fully exposed to the vagaries of international economics, from the
weak euro to Asian financial problems. In fact, I've recommended the stock several times before at
higher prices, only to watch it go even lower.
At this point, however, I don't see how it could fall much more. Analysts have reduced earnings
estimates for the current fiscal year (ending Oct. 1, 2001) from $3.50 a share two months ago to as
little as $2.10 today. But even based on these reduced estimates, at $38.50 a share the stock is
trading at less than 19 times earnings, or just 0.8 times its long-term growth rate.
Business conditions may well be tough through the first half of 2001, and some analysts see the
stock going as low as $33 or $34 before bottoming. But business conditions should improve by the
second half. Given that the stock could easily trade at more than double today's price in a more
favorable market, the potential upside looks 10 times greater than the downside.