| BUSINESSWEEK ONLINE : MAY 3, 1999 ISSUE | ||||||||
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| COVER STORY
The Highfliers: From Vertigo to 'Only Very Volatile' It certainly looked scary. On Apr. 19, sharp declines in AOL, Microsoft, and Cisco yanked the tech-heavy NASDAQ index to its second-worst point decline ever. In a few hours, the index fell 138.43 points, or 5.6%. The 15 companies in the Dow Jones Internet Commerce Index dropped a record 17%. Fear not: The bull market in technology isn't finished. Crashlike events, particularly in Internet shares, are all in a day's work in high-tech La La Land, where prices, returns, and risk share the same swath of virtual reality. It's a weird vista where intergalactic highfliers like eBay and Priceline.com can make stars like Dell Computer look merely stellar. Eventually, quips Marc Klee, co-manager of the John Hancock Global Technology Fund, ''Tech stocks will settle down and become only very volatile instead of extremely volatile.'' That's why many investment pros view the April tumble as little more than a profit-taking breather after an extraordinary runup. On Apr. 16, the Pacific Stock Exchange Tech 100 Index stood 70.6% above where it was on Jan. 1, 1998. The Dow Jones Internet index was up 572%. The Standard & Poor's 500-stock index gained 36% in the same time period. And tech stocks still have the greatest profit potential--never mind those high-profile, earnings-free Internet start- ups. First Call Corp., which tracks analysts' estimates, says second-quarter tech profits will grow 40%. The next-strongest industry--consumer cyclicals such as auto makers, home construction companies, and retailers--will see 25%. Those projections hold despite the unsettling news that led up to Apr. 19. The sell-off began the previous week with bad news from Compaq, IBM, and Intel. Compaq said profits would come in 50% below last year's first quarter (page 162). IBM announced it was losing money in PCs and Intel warned of a weakening profit picture. ''A HERD.'' Before the week was out, the problems at three industry bellwethers had shaved 5.3% from the Pacific Stock Exchange Tech Index. The coup de grace came the following Monday when ''old economy'' stars such as Boeing Co. and General Motors Corp. reported strong earnings. That encouraged investors to ''start broadening their choices'' to include lower-priced industrial stocks in portfolios, says Stephen M. Oristaglio, Putnam Investment's deputy chief investment officer. What started out as portfolio balancing turned into a rout when thousands of online traders started selling, says Laszlo Birinyi, market strategist for Birinyi Associates Inc. The average trade in America Online Inc., for example, was just 857 shares, indicating a lot of small trades, he says. ''It becomes a herd of cattle you can't stop,'' says Mayer Offman, chief strategist at day-trading firm Carlin Financial Group in New York. And, as the bull market has shown, the herd can change direction instantly. After the Dow Jones Internet index dropped 36% in two weeks in February, it went on to new records. And in two days after the NASDAQ's 5.6% plunge on Apr. 19, it roared up 6.1%. Still, the scare could have an effect. Klee predicts the move by investors into other sectors will make it tougher for lesser-known tech stocks to match the big gains of the past. Exhibit A: Priceline.com Inc. Shares in the company, which lets consumers bid on discounted items on the Net, went public on Mar. 31 at $16 each and quickly rose to $91. They fell from $81 to $59 on Apr. 19, and Klee thinks Priceline may now have trouble getting investors to move away from leaders such as Yahoo! ''With the broadening of the market, the cream of the tech companies will start rising to the top,'' he says. Tech investors should not lose faith. But they should keep their parachutes handy. By Geoffrey Smith in Boston, with Edward C. Baig in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 A Wiser Bull? COVER IMAGE: A Wiser Bull? TABLE: The Market Turns From Glamour To Grit CHART: Cyclicals Trump the S&P 500...Industry Comes Back...As Do Financials and Small Caps The Highfliers: From Vertigo to ``Only Very Volatile'' CHART: The Wild Ride for Net Stocks Commentary: Consider This: A Tech Slump May Spark a Hard Landing Boeing Breathes Easier TABLE: Forecast for Boeing: Partly Sunny TABLE: Profit Woes? Not This Time ONLINE ORIGINAL: How a Market Shift Could Realign the Mutual-Fund Stars INTERACT E-Mail to Business Week Online | |||
