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TECHNOLOGY STOCKS: IS THE BULL JUST TAKING A BREATHER?Forget this lull. Analysts see plenty of Internet-powered growth aheadTechnology stocks are in a summer funk. The Pacific Stock Exchange Tech Index dropped 10.8% between May 4 and June 1, taking back almost half of the industry's 24% gain prior to the sell-off. For good reason. An onslaught of low-priced personal computers and an oversupply of semiconductors are slashing profits across the industry. The Asian crisis is also taking a heavier toll on tech profits than many expected, especially at companies that have big contracts in the region. Laments Anthony Rizzo, manager of the Pimco Innovation Fund: ''This is one of the toughest periods for tech investing I've seen in a while.'' Is this the end of the four-year bull market in technology stocks? Don't bet on it, say many professional technology investors. Most of the pros remain generally bullish about the second half of the year. And although they're worried about sky-high prices on some Internet stocks, they're buying beaten-down personal-computer and semiconductor companies, along with software and communications equipment companies that are poised for rapid growth. Indeed, analysts are predicting nothing less than a gargantuan rebound in technology companies' profits in 1999: First Call Corp.'s consensus estimate forecasts a 31% rise. Why? Enormous growth in the Internet, and a hoped-for rebound in PC industry profits. If the analysts are right, the high-tech industry will grow faster than all major U.S. industries. ''POP BACK UP.'' Of course, tech analysts have been known for their wildly optimistic forecasts of future technology profits. That's one reason the market recently headed south. In January, analysts' consensus estimate for technology earnings in 1998 called for a 22% gain, according to First Call. The latest estimate, however, predicts a more humble 6% gain in tech earnings in 1998. With so much disappointment for tech stocks to absorb, they may find it tough going this summer. But most of the pros have their eyes focused on 1999. By then, they believe, the worst of the industry's problems will be gone. The bulls argue that PC industry profits will recover later this year as older models sell off and as consumers begin buying faster, high-margin PCs. Consumers will also step up their spending on a wide range of new high-performance products--such as cable modems and digital cameras--that will improve Internet connections and make the PC more versatile in the home and as a tool for business. This development could reignite powerful growth, say the bulls. ''Right now, the PC industry is like a balloon being shoved in a bucket of water,'' argues Ron Elijah, manager of Robertson Stephens Information Age fund. ''Pretty soon, it's going to pop back up fast,'' he says. Even if the tech industry doesn't recover quite so quickly or smoothly, most pros expect tech stocks to shake off their current woes in the second half. The U.S. government's antitrust threats against Microsoft Corp. (MSFT) and Intel Corp. (INTC) have had a chilling effect on tech stocks. But most pros discount the potential long-term effects on either company or the industry. The reason: The suits won't much alter powerful product cycles, driven by new Intel processors and Microsoft operating systems, coming over the next 12 months. And since product cycles drive tech stocks, investors are finding companies unjustly punished by the recent sell-off, as well as companies that are sidestepping the industry's malaise. Take Compaq Computer Corp. (CPQ), which is among the hardest hit by the PC downdraft. As the nation's largest PC maker, it's barely profitable, having built too many PCs that are now being sold at cut-rate prices. Though Compaq is down one-third from its 52-week high of $39, it's trading at a hefty multiple of 33 times expected 1998 earnings. But Rizzo thinks Compaq is poised for a fourth-quarter profit rebound. He plans to load up on Compaq when he sees lower inventories and more robust orders for new chips. A recovery at Compaq will benefit Intel. And Intel is one of Elijah's favorites. His argument: ''People are confusing today's market problems with a generational change in technology.'' He's convinced Intel will succeed in converting customers to its newest Pentium II processors well before competitors make inroads with their new chips. And the transition will help Intel overcome the profit pressure it's been under this year from booming sales of slower, lower-margin Pentium MMX chips. He doubts an antitrust suit will alter Intel's chip dominance. At $68 a share on June 1, he thinks Intel is a bargain. Intel's stock is trading at 19 times forward 12-month earnings, well below its peak. Many software stocks have avoided the PC industry malaise. Irfan Ali, a software analyst for Massachusetts Financial Services, likes Computer Associates International (CA), BMC Software (BMCS), and Compuware (CPWR). Shares in all three have risen sharply this year, but Ali thinks there is room to run. They all have stable pricing, high profit margins, high growth rates, and low price-earnings multiples compared with many other fast-growing tech stocks. Parametric (PMTC), which makes industrial design software, and Cadence Design Systems Inc. (CDNK), which produces chip design software, are two software picks of Marc Klee, manager of the John Hancock Global Technology Fund. Both companies have unusually stable growth prospects compared with many technology companies, Klee says, and may see 30% profit growth in 1999. And they're trading at price-earnings multiples in the low 20s. Some pros see the red-hot Internet boom continuing. Kevin Landis, manager of four technology funds owned by Firsthand Funds Inc., likes PMC-Sierra Inc. (PMCS), which makes semiconductors to expand bandwidth on the Internet. He says the company has a strong order backlog and will likely beat analysts' 1999 earnings estimate of $1.29 a share. At a recent price of less than $40, ''it's a steal,'' Landis says. The top technology-fund managers this year have trimmed their holdings in some frothy Internet names, including Amazon.com (AMZN), N2K (NTKI), and CDNow (CDNW). Paul T. Cook and Carl Wilk, who co-manage the Munder Capital Management NetNet fund, also aren't buying more Yahoo! Inc. (YHOO), which reached a market value of $7 billion in April despite only $67 million in 1997 sales. Yet Cook and Wilk still like Internet telephone stocks. Intertel Inc. and Comdial Corp. (CMDL) make boards that plug into PCs that allow users to make telephone calls through the Internet. For example, at a recent price of $11, Comdial is trading at a below-market multiple of 15 times 1998 earnings but should grow profits 20% this year, Wilk says. Cook is also betting on Intuit (INTU), which is expanding into Internet-based financial services, including mortgages, auto loans, and insurance. At a p-e of 41, Intuit is pricey for some. But if, like Cook and others, you believe that high-tech stocks are simply taking a summer break before returning to their bullish ways, now is a good time to search out bargains.
By Geoffrey Smith in Boston RELATED ITEMS
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Updated June 4, 1998 by bwwebmaster
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