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For the past 12 months or so, three stocks have defined the market: Cisco Systems (CSCO), Microsoft (MSFT), and General Electric (GE). This triumvirate has dominated the top end of the Standard & Poor's 500-stock index in terms of market capitalization, and they've kept trading places as the largest cap stock in the world.
Now, as the market continues its slow descent, each of these stocks has taken it on the chin -- except GE. Microsoft's well publicized run-in with the U.S. government, as well as warnings about a slowdown in PC sales, have forced its stock down 42% from its 52-week high -- to a May 15 close of $69.38. That has reduced its market cap to $361 billion. Cisco also has been battered during the past week by a change of investor attitude concerning its high-priced acquisition strategy. Its stock declined 27% off an April high and settled at $60 a share on Monday, slashing its market cap to $417 billion.
That leaves GE as the king of the hill. GE stock went from $129 a share the day before the Mar. 10 turning point in high-tech stocks to a high of $163.25 in late April. It held steady there until its 3-for-1 stock split on May 8, at about $54 a share, which gives it a market capitalization of $532 billion. GE shareholders may be crediting their good judgment in picking such a strong, well-managed company that is safe from the crosswinds of the technology stock arena.
PERCEPTION SHIFT.
But that judgment may turn out to be faulty. CEO Jack Welch fueled the recent rise in the price of the stock last year when he "discovered" the Internet and mandated that GE become the most wired company on the globe. Since then the company has become a leader in the business-to-business Web exchange marketplace, its financial division has become a dominant online bank, and most of its products can be bought over the Web.
Trouble is, the revolution hasn't exactly had a real impact on the company's top line. More than 95% of its revenue still comes from non-Net lines of business, things like jet engines, mortgage loans, and refrigerators.
That may not count for much when it comes to the way investors are currently valuing tech stocks. Internet hype helped propel the stock, and it could come back to haunt Jack Welch. The market is undergoing a shift in perceptions about the risks that tech stocks represent. GE has carefully shrouded itself in the mantle of a tech stock. If investors come to accept that view, it might not be able to disrobe fast enough if tech stocks continue to tumble.
Not everyone agrees with me that GE's stock price has risen so far so fast in the last few months because of the tech hype. "It's the steady upticks in the underlying growth rate that really has investors excited about this stock," says Banc of America Securities analyst Russell Leavitt, who rates the stock a buy. "It's not the technology aspect, although that has certainly played a part in it."
NO CISCO.
One thing's for sure. Now is not a good time to be a technology stock. The simplest way to characterize the market's punishing correction in April and May would be to say that investors are reassessing technology stock values overall. The Pacific Stock Exchange 100 index, a good proxy for the tech stock universe, has dropped 18.8% since Mar. 10, after having more than doubled the previous 10 months. Few tech stocks have escaped the wrath of this reappraisal.
Look at Cisco. I made a case on May 11 "What's Really Clouding Cisco's Star" that Cisco's stock was falling not because of any news or change in fundamentals but because the market had changed its mind on how much risk to take on with the stock. A week before that column, a price-earnings ratio of 190 had not been considered expensive. Now the stock has a lower stock price and a p-e of 166.
GE is no Cisco. Its trailing p-e is only 48, which is a bargain for a tech stock. It has increased its earnings at a rate of 12% a year for the past five years, vs. 50% for Cisco. For heaven's sake, GE even pays a dividend.
But a year ago, GE's p-e was closer to 30 and its growth over the past 12 months has been due to investor perceptions that it should be considered a tech highflier, not an Old Economy stalwart. Now that the market is discounting tech stocks, GE could be the next in line for a downward revaluation.
Hey Jack, remember the old adage: Be careful what you wish for.
Jaffe writes about the markets for Business Week Online Which analyst do you think is right? Let us know at our Ask Sam Jaffe Forum EDITED BY BETH BELTON
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