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Nightmare on Tech Street
Are tech stocks with frightening performances in 2004 worth buying heading into 2005?
October 28, 2004: 3:51 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - Freddy Krueger, Leatherface and Hannibal Lecter have nothing on Ciena, Agere Systems, Foundry Networks and Cypress Semiconductor.

Those four stocks have been eviscerated this year, each plunging more than 50 percent. Now that's what I call scary.

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It's been a ghoulish year for many other well-known techs too. Chip equipment leader Applied Materials has dropped more than 28 percent. Dow component Intel has fallen more than 30 percent. Veritas Software has lost more than 40 percent of its value. The horror.

So in the spirit of Halloween, should investors consider taking a gamble on some of these tech tricks with the hopes that they can turn out to be tech treats in 2005?

Sure, it may be tempting to look at stocks like Ciena, Agere, 3Com and Applied Micro Circuits, which all trade for less than $5 a share, and think that they have nowhere to go but up.

Yet the odds don't look good for a recovery. In most cases, the tech stocks that have been massacred this year have dropped for a legitimate reason: analysts have cutting their 2005 profit targets faster than Jason Voorhees got rid of all those riled-up teens at Crystal Lake.

According to data from Thomson/Baseline, 47 tech stocks with a market value of at least $1 billion have fallen more than 30 percent this year. And on average, analysts have slashed next year's earnings estimates for these companies by a whopping 37 percent during the past three months.

By way of comparison, estimates for the Nasdaq are down just 2 percent while there has essentially been no change to estimates for the S&P 500.

And Todd Campbell, president of E.B. Capital Markets, an independent research firm catering to institutional clients, said that investors should expect earnings estimates for many of the tech losers to fall even further in the coming months.

"It's hard to get excited. There still could be some downside risk in the 2005 numbers, so I would focus on tech companies that are guiding up," Campbell said.

Spine-tingling P/Es!

What's more, this year's tech terrors still trade at pretty shocking valuations as well: an average of 34 times 2005 earnings estimates. The S&P trades at just 16 times next year's profit projections while the Nasdaq has a P/E of 23.

Scary tech stocks!
These prominent techs have plunged as analysts soured on their 2005 prospects.
CompanyYTD price change2005 EPS Est. Revision*
Agere Systems-60.7%-66.7%
Cypress Semiconductor-53.8%-76.6%
LSI Logic-46.3%-88.9%
* during past three months

"Valuations are fairly attractive in other areas of the market," said Ed Sheidlower, portfolio manager with Bryce Funds, an investment management firm. "Why increase your risk by buying tech companies and hoping for a turnaround when there's a possibility of buying stocks in other sectors that have given good guidance."

Sheidlower isn't a tech bear, however. He said he just prefers to buy tech stocks with more stable earnings growth prospects as opposed to companies where estimates are coming down, or worse, aren't even making money.

To that end, two of his top tech holdings are Scansource (Research), a technology distributor that is expected to post an earnings increase of 12 percent this fiscal year and 14 percent next year, and Alliance Data Systems (Research), an electronic transaction processing firm with a projected earnings growth rate of 21 percent next year.

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"These names aren't on the tip of everyone's tongue but they are the ones I'd rather be in at this point," Sheidlower said. "There are exciting opportunities in the steady growers in tech."

Campbell adds that the only beaten down tech companies that look somewhat attractive now are some of the larger semiconductor companies like Intel and AMAT since valuations have come down to reasonable levels.

"The chip sector is one area where people might be getting overly pessimistic. A lot of damage has already been priced in and if there is any strength in the economy in 2005 these stocks should do well," Campbell said.

Tech Biz
Tech stocks
By Paul R. La Monica

But he added that investors shouldn't get duped into thinking that this year's biggest tech dogs are good values just because they've experienced gut-wrenching price drops.

"It's a more sound investing move to wait for companies to prove themselves rather than buying them when they appear to be cheap," Campbell said.

So if you think the stock charts of some of this year's tech losers are creepy to look at now, just wait until next year. They may be truly bloodcurdling then.

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