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Riding out a tech storm
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January 5, 2000: 3:37 p.m. ET
Money managers debate whether tech stocks have further to drop
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - Sure, it was last century already -- but it was just a week ago that the Nasdaq composite closed out the year on a trajectory of seemingly unstoppable gains.
Now, the technology-heavy Nasdaq 100 index has spent the first days of 2000 in a particularly volatile mood. The index began the year by hitting another record high Monday, then sinking Tuesday in its worst point drop in history, then racking up an additional three-digit point loss early Wednesday before dipping in and out of positive territory by session’s end.
Market watchers attribute the Nasdaq’s choppiness this week to both new year’s profit-taking and heightened jitters over the possibility of another interest rate increase next month by the Federal Reserve.
But, they say, the Nasdaq’s late-session rebound Wednesday shows that the volatility also is presenting some good buying opportunities for pricey tech stocks that many observers say have soared above and beyond reasonable price levels.
"Investors had reacted with enthusiasm in November and December to all the good things that are happening in the technology industry. And I think stock prices simply got a little ahead of themselves, at least in the short term,” said John Leo, portfolio manager of the Northern Technology Fund. "I do not think it will take too many days like yesterday or even more mild selling pressure to bring about some cash flow back into the markets.”
The Nasdaq’s two-day drop never became a full-fledged market correction, although the index did dip near correction levels at one point earlier Wednesday. A correction, generally considered a 10 percent drop from an index’s highs, would put the Nasdaq composite at 3,718.04. The index traded down 7.03 points at 3,894.66 late Wednesday afternoon, down from a record high of 4,131.15 Monday.
But market watchers are divided over whether the Nasdaq has further to drop.
"It’s pretty much done,” said Alexander Cheung, portfolio manager at Monument Funds. "What happened is that we had a barn-burning two weeks before year-end ... it was not unexpected that there would be some selling at the beginning of the year.”
Meanwhile, Byron Wien, chief U.S. investment strategist at Morgan Stanley Dean Witter, warned that technology shares are overvalued and may contribute to a big market drop later this year.
"I don’t expect the market to go straight down, but I do think the market is very overvalued,” he said. "I think the technology sector ... is an example of that. So I do think we’re in for a correction some time in the first half. But whether this is the beginning of it or not, I can’t say.”
Berkeley Belknap, portfolio manager at Trainer Worth am & Co., also said that tech stocks may be in for several more weeks of losses. (626K WAV or 626K AIFF)
"It’s definitely a severe sell off -- we really expected it to happen,” she said. "More than anything it's just profit-taking from the incredible run-up of the past few months .. I think we could probably see the next week or two or maybe three continue to go down a bit, particularly the Nasdaq stocks.”
Several money managers said they are not worried about the sector because the fundamentals of the sector are strong.
"You look out the window and everything you touch and everyone you talk to shows that technology is becoming a bigger part of our lives. The Internet will be everywhere,” Cheung said. "I think basically they (investors) should look at this kind of correction as important days for an addition to their portfolio.”
The Nasdaq sell-off has been broad based, but Internet shares were hit particularly hard. Shares of Internet investment firm CMGI (CMGI) dropped 8-13/16 to 284-15/16, while search engine Yahoo! (YHOO) fell 24-1/2 to 418-1/2 and Internet software firm BroadVision Inc. (BVSN) lost 21-5/16 to 149. BMC Software (BMCS), which warned of disappointing fiscal third-quarter results, plummeted 28-11/16 to 48-5/16, while Free Markets Inc. (FMKT) continued a drop begun a day earlier after General Motors (GM) canceled a pact for its online auction services, falling 32-9/16 to 245-15/16.
But experts said that it’s also important to note that for many of these Web stocks, they are merely giving back a bit of what have been some stunning gains.
"We're still very optimistic about the both the macroeconomic aspects and the fundamentals of the Internet companies themselves,” said Neil Weintraut, a partner at 21st Century Internet Venture Partners. "If you look at a lot of these stocks that are so-called ‘off,’ they're still higher than they were two weeks ago.”
Should you step in now?
Market experts said that quality tech stocks that have fallen from 10 to 20 percent are worth a good, hard look from investors -- and investors seemed to be taking that advice by the late spurt of buying on the Nasdaq Wednesday.
"I think that the right thing for investors to do is to go back to that list of core names that they meant to own over the last year and didn’t,” said Roger McNamee, general partner of Integral Capital Partners. "And in our mind, that starts with companies like Cisco Systems (CSCO) and America Online (AOL) and Yahoo! ... and get yourself ready and maybe dollar-cost-average your way into these stocks.”
Investors concerned about market volatility also should look for market leaders that will do well long term no matter what happens with periodic dips, said Weintraut.
"My persistent theme, and it's not unique, is just to continue to own the leaders, whether it's Yahoo! or Dell Computer (DELL) or Cisco -- the leader stocks over an extended period of time are going to do well.”
For investors looking for some safety amid the ‘Net turmoil, they may want to look at shares of some of the hot business-to-business Web companies, he said, pointing to one such stock, Kana Communications (KANA), which was up 4-1/2 to 195-1/4 Wednesday afternoon.
But experts also say the Fed’s direction on interest rates will hang over the tech sector as well as the rest of the market over the next few weeks.
"So much depends on what happens with the interest rates -- tech is just a little wave on that tsunami wave,” Weintraut said. 
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