NEW YORK (CNN/Money) – Cisco's relatively good news Tuesday night sparked a decent rally in technology stocks Wednesday, with the Nasdaq gaining 1.7 percent. But Cisco's results don't point to an imminent turnaround for the overall tech sector, and most everybody still is skeptical.
"People are trying to look under the rocks for good news but there has been no visibility yet and no evidence of a recovery in information technology spending," said Adam Adelman, an analyst with Philippe Investment Management, a money management firm based in New York.
Even though Cisco reported better-than-expected earnings, revenue was slightly lower than expected. And CEO John Chambers did not give any indication that demand for Cisco's networking gear was increasing. Rather, Cisco performed well by taking market share from competitors and by keeping down expenses. It also helps that it has a pristine balance sheet, with $21.5 billion in cash and total investments and no debt.
In this regard, Cisco is very similar to Microsoft and Oracle, two other companies that appear to have solid long-term prospects. (To read about more companies that are thought to be Tech Survivors, click here.)
So Cisco's results merely affirm that leading tech companies are holding up better than their smaller rivals -- they are not a reason to suddenly get excited about the overall state of technology . Or to paraphrase a popular high school cheerleading chant, tech investors should Be Selective, Be Be Selective.
"We have long-term confidence that technology is not dead but you just don't want to go out and buy anything," said Noel DeDora, co-manager of the Fremont New Era Value fund. DeDora is sticking to market leaders that should be able to increase their dominance during these tough times. That's led him to buy Cisco and Microsoft, the fund's top two holdings, as well as Intel.
Follow the leaders
Jaye Morency, manager of the DLB Technology fund, agrees that now is not the time to place bold bets on small emerging technology companies. Microsoft and Cisco are her top two holdings and she also owns Intel. Morency says she added to her position in Intel on July 25 following a broad decline in semiconductor stocks.
| * As of most recent quarter, ** Based on estimates for next fiscal year|
| Sources: CNN/Money, First Call, Company reports |
In addition, she thinks that storage company EMC is starting to show signs that its business won't be getting any worse. "For high quality companies business has stabilized," Morency said. "They can wait for the market to turn and hopefully will be the first to bounce back."
Even Adelman, who acknowledges that he is generally bearish on the near-term prospects for technology, said he sees some decent values for the long run. One that his firm owns is outsourcing company EDS, which is paid to run computer systems for large corporations and government agencies.
Adelman says that bad news, such as a write-down that EDS was forced to take in the second quarter due to WorldCom's bankruptcy, has been priced in to the stock. EDS now trades at 10 times 2003 earnings estimates. Earnings are expected to increase by 14 percent next year.
DeDora also likes EDS and owns it in his fund. He says that the company's earnings are more predictable than other technology companies since EDS's business is driven more by large multiyear contracts as opposed to specific projects.
Another company that Adelman owns is Hughes, the satellite TV tracking stock for General Motors. Hughes owns DirecTV and is in the process of merging with rival satellite TV firm EchoStar but there is concern that this deal will fall through due to antitrust concerns. Adelman says that regardless of what happens with the deal, he favors Hughes over EchoStar – and cable firms for that matter – because of its lower valuation.
Adelman says he looks at valuation per subscriber for cable and satellite firms since these companies tend to report net losses due to large depreciation and amortization expenses. Based on current market capitalizations and subscriber counts, Hughes is valued at about $800 per subscriber while EchoStar is valued at more than $1,000 a subscriber. Cable companies are more expensive. Comcast and Cox Communications are valued at nearly $2,000 a subscriber.
But overall, even though money managers are starting to nibble at some tech stocks, Morency says she doubts the tech sector as a whole will be able to sustain a rally in the coming months because of seasonality. She says companies typically are reluctant to spend a lot on technology purchases during the summer doldrums months of July and August. So investors shouldn't expect huge improvements when third quarter results start to get reported in October.