NEW YORK (CNN/Money) -
"Don't believe the hype."
Tech stock investors should take heed of these words of wisdom from rap legend (and digital music pioneer) Chuck D of Public Enemy. Despite some good news from some leading tech companies last week, it still seems premature to declare an end to the tech spending downturn.
"I don't think there's enough evidence to support the argument that there is a recovery in information technology," says Adam Adelman, an analyst with New York-based money management firm Philippe Investment Management. To that end, semiconductor companies Texas Instruments and Taiwan Semiconductor issued earnings warnings on Tuesday.
The Nasdaq is up nearly 17 percent in the past two weeks. And yes, IBM, Nokia and SAP reported better-than-expected earnings for the third quarter last week, easing the sting of earnings warnings from Intel and Motorola. (For more reaction to those warnings, click here.)
But Adelman cautions against reading too much into the earnings news, noting estimates already had been lowered substantially. For the most part Adelman is steering clear of tech, but he does own Microsoft and printer company Lexmark.
"A lot of people get carried away when a company beats by 2 cents without realizing that the number is dramatically lower than a year or two ago," he says. "Investors are getting so myopic. Just because a company can beat numbers by a penny does not mean that we have blue skies ahead."
No news is good news?
So what about guidance for the future? There was little in the way of specifics, let alone optimism, from IBM, Nokia or SAP. Big Blue simply said it was comfortable with fourth-quarter estimates. Analysts are expecting earnings of $1.35 a share, which would be a 36 percent improvement from the third quarter but a 7.5 percent decline from a year ago.
Nokia said the fourth quarter would be strong but refused to comment about 2003. Analysts are predicting just a 4.5 rise in earnings for the fourth quarter and a 9 percent increase for 2003. SAP, while not warning, backtracked on its 5 to 10 percent revenue growth target for 2002, citing the unpredictable political and economic environment.
And these are among the best-positioned companies in tech. With this in mind, some institutional money mangers say the current tech stock ebullience might be a little overdone.
"We are not heavily invested in tech and are not likely to be so until we see fundamental progress. We've always selected companies with strong earnings growth and most technology companies don't have that at this point," says Kent Mergler, president of Northstar Capital Management and manager of the Fremont New Era Growth fund.
Mergler says he's sticking with individual companies with strong market share as opposed to making broad bets in technology. He currently owns Dell, Microsoft and outsourcing company Affiliated Computer Services, but that's about it.
Focusing on companies with leading market positions is a strategy that Chris Bonavico, manager of the Transamerica Premier Aggressive Growth fund and Transamerica Premier Growth Opportunities fund, is following as well. He also likes Microsoft and says that Expedia, Adobe and storage equipment company QLogic are among his tech stock holdings as well.
He does not, however, think that a broad based recovery is in the offing for tech mainly because there still is a glut of tech-related products as a result of the last boom cycle. "One result of the '90s was that we now have too much of everything. There's too much software. Too much fiber optics," he says. "Many of the big names of the late 1990s are broken companies and I would not rotate back into them."
Bonavico specifically mentioned customer relationship software companies Siebel and PeopleSoft, telecom equipment firm JDS Uniphase and server maker Sun Microsystems as companies he's avoiding.
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Because of the overcapacity in the industry, more layoffs are probably likely before we can expect a meaningful and long-lasting recovery, says John C. Thompson, manager of the Thompson Plumb Growth fund. "The tech industry overstaffed in anticipation of a rebound. The only way we're going to get a rebound is to see them cut more jobs."
In other words, focus on companies that are able to keep a tight rein on costs since it does not appear as if increased sales of tech products and services will be spurring earnings growth anytime soon.
"Even the best companies like IBM are saying they are seeing no pick up in demand," says John Rutledge, manager of the Evergreen Technology fund. "It is strictly that some companies are doing a better job of managing their costs and expenses."
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