Further downside bias for technology stock prices (page 1 of 2)

US Stocks

In the last 12 months, the DJIA declined by 14.20% and the NASDAQ was down by over 56%. On a relative basis the Dow outperformed the NASDAQ. The main reason for this is that the rotation out of the TMT sectors (Telecommunication, Media, & Technology) continued to benefit the non-tech stocks in the DJIA.

Of the 15 component stocks that outperformed the DJIA, only SBC Communication is in the TMT group. On average, the group has gained 9.7% and outperformed the DJIA index by close to 24%. By default, these stocks were being bought up to quite high valuation. From an earnings perspective, these valuations do not reflect the trending down of profit growth. The stocks in this group are poised for a fall if the economy starts to turn south.

The second group also consists of 15 components stocks that underperformed the Dow. The average loss was over 33% and the group underperformed the index by 19%. The largest loss came from the technology (hardware) and financial sectors. The weakness of the financials are particularly worrying. Perhaps, this is heralding the coming economic slowdown. In terms of earnings, the group did not fare better. The trend is still pointing down, although showing signs of stability. But the group has more negative estimates relative to the first group. If we get a full-fledged recession, these stocks cannot avoid further sell-off pressure, because their earnings estimates have to be revised further down.

If we get a respite from the reopening of the stock markets due to the efforts of the world's central banks, then our clients may consider raising some cash. Perhaps it will be the calm before the storm.

US Technology

Cautious on technology stocks. Last week, we suggested to investors to stay out of technology issues to allow falling prices to stabilise and consolidate first. This week, we reiterate the same recommendation to "HOLD", especially after the tragic events from last week in the US and the subsequent increase in uncertainty (on an IT spending rebound and earnings pick-up). Expectations on technology stock price movements for the week ahead will be biased towards the downside as investors remain concerned about company earnings. Nevertheless, we look forward to the NASDAQ Composite index to potentially consolidate between 1620 and 1480.

Software maker Oracle Corporation (ORCL US $11.46 CSFB rating: Strong Buy) reported Aug 1Q02 earnings of $510.6 millions last week. Sales were flat from last year at $2.54 billion. The company's net income met its lowered expectations, but appears to be continuing to struggle. EPS of $0.09 beat expectations of $0.08 a share. The company is facing the toughest market it has seen in 10 years, which we believe to be an indication for investors to remain cautious in the short-term. To add, ORCL and the rest of the software industry do not see an end to the slump in sight. ORCL's database new licence revenue declined 26% yoy (year-on-year) in the US (total database revenue declined -8% yoy) due to the slow economy and increased competition from Microsoft Corporation (MSFT US $57.58 CSFB rating: Strong Buy) and IBM (IBM US $96.47 CSFB rating: Hold).

The company's application business (new licence revenues) has also shrunk at an alarming rate of -56% sequentially (year-on-year fall of -6%). We believe ORCL's current conditions illustrate how tough the next few months will be for the software sector in general. For investors who own the stock, we recommend to HOLD in the short-term to allow price to settle down first.