Nasdaq rides on bearish side

Profitable lesson: The Nasdaq's bubble has burst and along with it the dreams of starry-eyed high-tech investors who thought profits didn't count.

October 15, 2000|By William Patalon III | William Patalon III,SUN STAFF

Even with Friday's powerful rally, the Nasdaq composite index has fallen more than a third from its high seven months ago, vaporizing nearly $2 trillion in shareholder wealth, plunging technology stocks into a deep bear market and leaving investors to wonder where the bottom might be.

"I'm not sure we've seen the end of it yet," said Gil Knight, a principal with Allied Investment Advisors in Baltimore, who manages the company's Ark Small Cap Fund.

That's not what investors want to hear: The Nasdaq is down 18 percent for the year and has plunged 34 percent from its March 10 high - close to double what's needed to label this sell-off a bear market.

The index that embodies the U.S. high-tech sector hasn't done this poorly since 1974, when it was down 35 percent. The pain has been especially excruciating in the past six weeks, during which the Nasdaq has dropped by a quarter.

"It's a major bear market," said David Elias, president of Elias Asset Management near Buffalo. "The Nasdaq is having its own private bear market."

Stocks, in general, are having a tough year: The Dow Jones industrial average is down 13 percent from its high and the Standard & Poor's 500 index has slid 10 percent.

But that's nothing compared with the bloodletting that's taken place almost across the board among Nasdaq companies.

The stock of computer-chip giant Intel Corp. is down by close to half. Corvis Corp., the Columbia maker of optical-networking equipment that went public in late July, also has seen its stock drop almost by half. And the shares of former Internet darling Priceline.com - despite its aggressive advertising campaign and quirky commercials featuring actor William Shatner - have plummeted 94 percent.

The Dow for decades was the celebrated singular gauge of the stock market, but in recent years the big returns generated by technology stocks has transformed the Nasdaq into the darling of many investors.

However, high-tech companies, such as Intel and Microsoft Corp., and such sector powerhouses as Dell Computer Corp., Cisco Systems Inc. and EMC Corp., have done more than put billions in profits into investors' pockets: They've been a big part of the fuel that's powered the record economic run, now in its 10th year.

Investors saw this and last year poured money into technology stocks. Stocks soared, with the Nasdaq rocketing 86 percent. This performance carried over into this year, with the index surging another 24 percent to reach a record close of 5,048.62 on March 10.

The higher prices rose, the more bullish and euphoric investors became, analysts said. What started as a bull market in the technology sector became a true "bubble," a financial mania in which prices are bid up far above any realistic measure of value.

But, as the sell-off in the Nasdaq underscored, manias can only last while conditions are perfect. The least little bit of uncertainty is like a dash of cold water that not only brings investors back to reality but also causes them to overreact, dumping stocks and sending prices down below where they more reasonably would be, professional investors say.

Experts agree that plenty of uncertainty remains. Right now, the biggest bit of uncertainty has to do with earnings.

Wall Street has traditionally valued a company's stock based on how much the company was earning and how fast those profits could grow.

While the prices for technology stocks were on the march last year and early this year, venture capitalists with big holdings in privately held technology companies, many of them Internet-related, cashed in.

The venture capitalists took advantage of the insatiable demand for technology stocks and high market prices to sell off pieces of their companies through initial public offerings, or IPOs.

These IPOs soared, too, even though most of those companies were profitless - and were destined to stay that way for years to come. It didn't matter, experts said: Wall Street changed its mantra and said that sales were the key. If it was a technology company, and sales were growing, it was a valuable property.

Now, Wall Street says that profits do matter, and most of these Internet stocks have crashed, leaving their shareholders to wonder if these companies have a future.

"It was a return to reality," said Rob Gensler, portfolio manager of the T. Rowe Price Media and Telecommunications Fund. "Wall Street has a nasty way of changing the rules in the middle of the game."

Once investors reverted to the old rules and decided that profits were the name of the game, they've been decidedly unforgiving with companies that either failed to deliver, or warned of rough waters ahead.

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