Investors Aren't Buying What Tech Bulls Are Selling ... Weiss comments

LOS ANGELES - Despite the rebound in technology stocks in January, many investors remain suspicious about the industry's earnings-growth potential in 2001 and beyond.

That suspicion showed up in the pullback in many tech stocks in recent days after the January jump, analysts say. The tech-dominated Nasdaq composite index rose 21.28 points, or 0.8%, to 2,664.49 on Tuesday, but its year-to-date gain has been pared to 7.9% from 12.2% at the end of January.

Cisco Systems only added to the concerns Tuesday as it reported quarterly sales and earnings that fell short of expectations -- a rarity for the computer networking giant.

The Cisco news, including the company's warning to analysts to be more conservative in their view of sales growth potential in the next two quarters, points up the risk in tech stocks, even at what may appear to be severely depressed prices, experts say.

Though the share prices -- and the stocks' price-to-earnings ratios -- are far below their peak levels reached last year, most tech issues still carry lofty P/Es relative to the average stock.

Historically, Wall Street has always rewarded the fastest-growing companies with higher stock P/Es.

But if current expectations for tech firms' earnings growth in 2001 turn out to be wildly optimistic, the stocks could be hammered even lower, analysts warn.

Overall, investors are taking a much more conservative approach to tech stock P/Es now than last year. But the declines in valuation are relative.

Cisco shares, after a steep decline, now are priced at 46 times the 78-cents-a-share that analysts on average expect the company to earn in its fiscal year ending in July.

Cisco's stock had sold for a P/E of nearly 190 at its peak last year, so the current P/E is a sharp discount to the levels that prevailed during the tech stock frenzy. But whether 46 is "cheap," analysts note, depends on whether Cisco in fact meets current 2001 earnings estimates -- and whether the estimate for 2002, now 99 cents a share, remains realistic.

Jeffrey Applegate, investment strategist at brokerage Lehman Bros., argued in a note to clients this week that major technology stocks as a group are undervalued given their expected long-term earnings growth rates and the stocks' current P/E ratios.

But judging undervalue and overvalue in the stock market is hardly an exact science. And as many tech shares have demonstrated over the last year, the higher the P/E, the greater a stock's likely plunge if the company disappoints even slightly.

The majority of tech companies are still outrageously overvalued. We believe that the Nasdaq still has to fall by as much as 50% before getting back to reasonable levels. Finding a reasonably priced tech company is like finding a needle in a haystack. And, chances are, even if you find a company with a low P/E, it will get caught in the wave of selling that is bound to wash over the tech sector.