Tech Stocks: No Safe Haven

Investors looking for a port in the storm won't find it in tech stocks, which have been hurt by the dollar's rally and tighter IT budgets

by Aaron Ricadela

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Amid the rash of bad news emanating from Wall Street, investors could have yet another setback to stew over. Technology stocks, once a haven from the storms roiling the financial sector, again are vulnerable.

For much of the past year, investors have considered technology companies something of a safe harbor from the credit crunch and the soaring price of oil and other commodities. As the crisis worsened, tech companies' values were boosted (BusinessWeek, 9/10/07) by their stores of cash, paucity of debt, and substantial overseas sales that benefited from a weak dollar.

Now, a rally by the dollar since mid-July is quickly erasing currency gains at many tech outfits, while layoffs, tight access to credit, and slumping profits exact an even greater toll on companies' IT budgets. As a result, the argument for buying tech stocks is getting thinner, according to analysts. "I'm underweighting technology," says Tobias Levkovich, chief U.S. equity strategist at Citigroup (C). "A year ago it was an interesting area. Now it's more challenging."

Losing Their Lift

Case in point: Dell (DELL). The computer maker said on Sept. 16 that it's "seeing further softening" in demand just weeks after reporting "conservatism" in IT spending. Dell expects to incur costs for eliminating jobs, making acquisitions, and taking other steps to "improve competitiveness." The company's shares fell more than 8% in early trading, extending a 29% percent slide since the company reported a second-quarter earnings decline on Aug. 28(BusinessWeek.com, 8/29/08).

Since the dollar began a comeback against the euro on July 15, investors have hammered shares of tech-portfolio stalwarts such as Apple (AAPL), down 19.3% through the close of trading Sept. 15; and Oracle (ORCL), down 7.5%. By comparison, the Nasdaq Composite Index slipped 1.1% in that period, while the Standard & Poor's 500-stock index fell 2.9%. Apple, IBM, Oracle, and Hewlett-Packard (HPQ) are among the tech companies that Wall Street says could deliver lower-than-expected growth in the coming quarters as they lose the lift they previously got from conversion of foreign sales into dollars.

Internet stocks aren't safe, either. Shares of Yahoo (YHOO) have fallen 16.5% since July 15, to an almost five-year low of $17.75 on Sept. 4. Investors fret the stock price won't recover after the board rejected a $33-per-share takeover offer from Microsoft (MSFT) in May. Even lofty Google (GOOG) has lost 17%, most recently on fears the U.S. government may take steps to curtail the company's control of areas of online advertising (BusinessWeek.com, 9/15/08).