11/10/97 HIGH-TECH STOCKS: KEEPING THE FAITH, SO FAR

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HIGH-TECH STOCKS: KEEPING THE FAITH, SO FAR
Loyal investors see them as a harbor from Asian woes. Are they?
By now, it must be a reflex. On Oct. 27, Richard L. Brown did what investors have done for the past few years. As Intel Corp. shares tumbled as low as 69 1/4 during the day's free fall, the Washington attorney and private investor jumped into the market. By late Tuesday, Brown was feeling a warm glow as Intel reversed course and closed at 85, up 10 1/4. ''I was willing to take a boatload of Intel stock at 70,'' joked the partner at Brown Nietert & Kaufman.
Buyers like Brown have made tech shares the engine in the stock market's three-year climb. In each pullback, they have jumped in, betting on the sector's torrid growth rates and strong earnings potential. So far, they've been right on the money: Even after the Oct. 27 shock, fast-growth star Dell Computer's stock is up 214% year to date, Compaq is up 112%, and Lucent Technologies Inc., 78%.
What keeps the faithful coming back are prospects of double-digit sales gains in everything from PCs to telecommunications equipment. That translates into continuing solid earnings growth. Wall Street analysts are holding tight to bullish projections for 1998: First Call Corp. says the consensus is profit gains of 31% for communications equipment makers, 23% for computer makers, and 22% for makers of chips and software.
Still, there are signs that the tech sector won't be quite as frothy going forward. Asia's woes, for one, could put a crimp on spending, since that region accounts for some 25% of worldwide purchases of information technology. Hardest hit could be semiconductor equipment makers, which sell about 40% of their wares in the Asia/Pacific Rim countries. ''There will be some short-term pain,'' says International Data Corp. Senior Vice-President Frank Gens.
Already, high-tech price-earnings ratios are more earthbound. The p-e of the Standard & Poor's software index, for example, has fallen 26.5% since Oct. 24, while the p-e of the communications equipment index has been sliced nearly in half.
On the other hand, investors haven't given up on finding the next Netscape among new high-tech issues. Bankers say that some marginal deals may not get done now. But there were plenty of buyers on Oct. 29 when MMC Networks Inc., a Sunnyvale (Calif.)-based startup that makes powerful networking chips, went public. It opened at $11 a share on Oct. 29 and closed at 21 3/8.
Indeed, for many tech companies, the Asian plunge could even be a plus. Devaluation could cut manufacturing and component costs for companies with large Far East operations such as Compaq, Intel, and Philips Electronics. Moreover, Asian manufacturers are likely to scale back expansion plans--perhaps slowing the flood of memory chips that has pushed down prices and pinched U.S. chipmakers Micron Technology Inc. and Texas Instruments Inc. (page 134), says TI Chief Economist Vladi Catto. ''Any postponements in Korea and Taiwan will bring demand and supply into equilibrium earlier,'' he says.
THE PINCH. Another reason the market plunge that started in Hong Kong does not faze tech investors is because they have factored in a soft Asian market. Sales of computers and software have been sluggish there all year--with little harm overall. Even with slowdowns in Korean and Japanese PC markets, global sales of desktop machines rose 16% in the third quarter, while sales growth in the U.S. was up 20% over a year ago, says International Data Corp.
Besides, not all Asian countries are feeling the pinch. ''They don't go all at one time,'' says Compaq Computer Chief Financial Officer Earl L. Mason. Compaq expects ''reasonable growth'' in Asia next year, thanks to China, which hasn't caught the Asian economic flu.
In the U.S., demand is still strong--partly because prices continue to tumble. And that, says Loewenbaum & Co. technology analyst Ashok Kumar, could be a problem next year. Intel Corp. and Gateway 2000 Inc. recently had negative earnings surprises because of price pressures, and 1998 could bring more of the same. ''We're not recommending people add to their holdings of PC and semiconductor [stocks],'' he says. Dell, Compaq, and Hewlett-Packard have prospered in 1997 by taking share from second-tier companies, he notes. In 1998, they'll be gunning for each other. ''The fun is just beginning,'' he says. Fun, carnage--another golden buying opportunity?
By Gary McWilliams in Houston, with Ira Sager in New York and Linda Himelstein in San Mateo, Calif.

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