NEW YORK (CNN/Money) -
For tech stock investors, this should be the most wonderful time of the year.
But even with earnings compelling and tech companies telling you to be of good cheer, is it the most wonderful time of the year?
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Despite strong 3Q tech results and encouraging guidance for 4Q, the Nasdaq has failed to break through 2000. |
Intel (INTC: Research, Estimates) raised the midpoint of its revenue guidance for the fourth quarter last week and boosted its target for gross margins, a key measure of profitability. Wireless chipset firm Qualcomm (QCOM: Research, Estimates) indicated that business is booming. National Semiconductor (NSM: Research, Estimates) reported a more than tenfold increase in its fiscal second-quarter profit and gave a rosy outlook.
The festivities weren't just for chip firms, either. Telecom equipment maker Motorola (MOT: Research, Estimates) reaffirmed fourth-quarter sales and earnings guidance. So did technology distributor Ingram Micro (IM: Research, Estimates). And antivirus software developer Network Associates (NET: Research, Estimates) raised its sales and earnings targets for all of 2004.
All told, 40 percent of the tech companies that have preannounced fourth-quarter results through Dec. 5 raised guidance, according to First Call, while another 40 percent warned. This is much better than the same time a year ago, when 53 percent of the preannouncements were warnings and only 30 percent were positive.
Good news is not good enough
So why are tech stocks still stuck in a trading range? The Nasdaq composite index has made several efforts to close above the elusive 2,000 level since early October but has yet to do so. Last Wednesday, the Nasdaq briefly peeked above 2,000 but couldn't stay there. And despite all the good news in techland, the index ended last week with a slight loss.
Considering that the Nasdaq is up 45 percent year-to-date, it looks like it's going to be increasingly difficult for techs to head higher soon unless earnings news is substantially better than expected. The market has simply priced in solid results already for the fourth quarter, 2004, and perhaps beyond.
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"We don't see the type of value in the sector that we saw six or seven months ago," said Bob Straus, manager of the Icon Information Technology fund. Straus said his fund has sold many of its holdings in chips, chip equipment, Internet services and software since the stocks have run up so dramatically.
Intel shares, for example, fell more than 4 percent after the company raised the low end of its fourth-quarter sales forecast. So even though the company now expects sales to be about 20 percent higher from year-ago levels, which is extremely strong, that wasn't enough to satisfy investors who have bid up the stock 107 percent this year.
Another factor that could be holding tech stocks back is that so far there's little concrete evidence that 2004 will be much better. In fact, there are some concerns that the robust third quarter and fourth quarter results may be just a blip.
Richard Williams, strategist for Summit Analytic Partners, fears that consumers, who have helped fuel much of the recent strength in the sector, may finally pull back on spending. Even worse, corporations will remain reluctant to invest in new technology, which means tech stocks could be in for a nasty fall, Williams said.
Laggards may be better bets
But even if 2004 is good, earnings growth for the next few years may not be strong enough to justify current valuations. The S&P Technology sector is trading at 29 times earnings estimates for the next four quarters, a substantial premium to the overall market. Earnings are expected to rise 29 percent next year but just 14 percent annually over the next three-to-five years.
"Most worrisome to us is the increasingly cavalier attitude to tech valuations. Much is reminiscent of the late 1990s," wrote First Call director of research Chuck Hill in a recent report. "We still believe the operative word for this recovery is 'gradual'. A gradual recovery is not a bad thing unless expectations rise to levels well above reality."
Still, stocks that have trailed this year's rally may be able to benefit from good news. Qualcomm surged 10 percent after it boosted its fiscal first-quarter guidance Thursday. But before this, the stock was up "only" 23 percent year-to-date. That's a solid return normally but pales in comparison with the 72 percent gain in the Philadelphia Semiconductor Index.
So tech investors might be wise to look for other laggards instead of continuing to make bets on the year's big winners.
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