NEWS AND COMMENTARY October 9, 2000 Can The Nasdaq's Biggest Techs Survive Recent Bear Mauling? By Gregory Zuckerman and E.S. Browning, The Wall Street Journal Tech Wreck Still Has A Long Way To Go ... Weiss comments NEW YORK - The Nasdaq Composite Index since Labor Day has labored mightily. The index, dominated by such heavyweights as Microsoft, Oracle and Intel, is down a jaw-dropping 20.6% since Sept. 1. It is 33% off its high from March. If the Nasdaq hadn't already been firmly in a bear market, commonly considered to be a 20% drop by an index, this post-Labor Day drop would be big enough on its own to put it in one. This isn't just a quirk of the index, or a problem with the largest Nasdaq stocks. It has been a thorough thrashing: According to market-trackers Birinyi Associates in Greenwich, Conn., some 1,364 Nasdaq stocks are down 20% or more since Sept. 1, of which 830 are down 30% or more; 415 are down 40% or more; and 185 are down 50% or more. Those figures come from a universe of 4,200 Nasdaq stocks that Birinyi follows. The problem? More earnings warnings from blue-chip technology companies, and the market's general pessimism about the future of earnings. Optimists, of course, say the worst of Nasdaq's declines must surely be over. Among the stocks leading the Nasdaq down are many of the same high-technology heavyweights that powered the index to its record surge last year and the high of this past March. They include Intel, which has lost 45% of its market capitalization since Labor Day; Dell Computer is down 40%; Oracle Corp. is down 25%; and Microsoft is down 21%, according to Birinyi. "The lesser-quality techs went down first and a lot of the better-quality companies held up, but now it seems the unbroken ones are starting to go down too," says Richard McCabe, chief market analyst at Merrill Lynch. On Friday, the Nasdaq composite plunged 3.2%, or 111.09 points, hurt not only by earnings fears but by inflation fears triggered by the latest employment report. The index finished at 3361.01, its lowest close since May 26. The heady days of Nasdaq 5000, in March, seem far away. During the nasty week, the index sagged 8.5%, or 311.81 points. There is a rapidly emerging view among nervous investors that some big companies, especially the technology titans, may not be able to expand their revenue and earnings as fast as previously anticipated. Earnings and revenue warnings from the likes of Intel, Dell, Apple Computer and other big companies such as Xerox and Eastman Kodak sparked the nervousness. "Everyone's looking at stocks like Intel and extrapolating to the other leading Nasdaq companies," says Marshall Acuff, equity strategist at Salomon Smith Barney. Despite the recent sell-off, stocks are still expensive, by some measures. A widely followed valuation model that some say is favored by the Federal Reserve Board, and includes bond yields, stock prices and earnings, shows that the stock market is 34% overvalued, according to Edward Yardeni, chief global economist and investment strategist at Deutsche Bank Securities. That is down from 63% at the beginning of the year but doesn't suggest that much bargain hunting is in the offing. "The correction in technology isn't over, sentiment figures still show that investors are very complacent about this decline and until that changes we won't see a bottom," Mr. McCabe says. We've been telling you about the problems in the tech stock market from the very beginning. These big-name stocks built up to such enormously high valuations that collapse was inevitable. And even though the Nasdaq has fallen 20.6% since Sept. 1, it will continue to fall further. Investors have finally come to realize that most tech stocks are extremely overvalued. Furthermore, it's not just the slowdown in the U.S. economy, high oil prices, or the weak euro that is killing tech stocks. There are problems inherent in their business plans that make tech stocks particularly vulnerable to any external pressures. Many of these companies -- Amazon.com is a good example -- have a business plan that prevents them from turning a profit, opting for market share over earnings. Some dot-coms give everything away for free while hoping to make a buck selling advertisements. Still other tech companies (think Priceline.com) had a novel idea, but weren't ready for the competition. This month's issue of Safe Money tells you who the next victims of the tech wreck are likely to be, so you'll know who to watch out for and how to profit from the Nasdaq's nosedive. To order a subscription to Safe Money Report, visit our Storefront.

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