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3/4/2003
02:07 PM
William Schaff
William Schaff
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Taking Stock: Some Old High-Fliers Are Back In The Air

Investors could be forgiven if bubbles come to mind

Remember back in early 2000 when tech stocks just kept going up? In particular, the Internet- and telecom-related issues defied gravity to an absurd degree. You might be surprised to learn that during the recent rallies in tech stocks, some old names have performed extremely well. One could be forgiven for thinking of bubbles.

Since the stock market hit its 12-month low on Oct. 10, 2002, the S&P 500 index has risen 20%, while the Nasdaq Composite has increased 35%. The picture is similar from the beginning of the year: The Nasdaq is up almost 12%, with the S&P 500 Index posting a 4.5% increase. This time the best performers aren't the large technology companies that made headlines during the bubble days. But you might recognize some of the top performers: Expedia (up 98% year to date), Juniper Networks (up 86%), Lucent and Corning (both up 82%), Nortel Networks (up 76%). Yahoo has risen 59% in value since Jan. 1. A couple of other star performers include Citrix, EMC, and Network Appliance. All of these names rose to heady levels during the bubble only to decline as fast and even further. Most of these companies are either Internet-related or communications-related.

Some of the biggest names in technology have risen far less. Microsoft, still the largest tech company, has declined 4% since the beginning of the year. IBM is up 12%, more in line with the Nasdaq Composite. Cisco and Intel, though, have both posted nice increases in value this year, up 20% and 22%, respectively. Some of the laggards among large tech companies are Hewlett-Packard, down 3% year to date, Qualcomm, down 17%, and Motorola, down 15%.

Performance isn't the only thing that invokes thoughts of a bubble. Few of these tech stocks look cheap. While the crash in tech stocks was painful, valuations never reached truly depressed levels and hardly seemed cheap even when they bottomed out. Take some of the semiconductor capital-equipment companies. Neither Applied Material Technologies nor KLA-Tencor dipped below two times their book value, usually the point where semiconductor capital-equipment stocks start to look interesting. The valuations in the spring of 2000 got so ridiculous that the subsequent crash only took out some of the excesses. Investors have been burned badly by falling stock prices or are waiting on the sidelines, hoping to scoop up some cheap stocks. The idea is that in an economic rebound, technology stocks would be among the first to recover as spending on IT picks up. And technology stocks have recovered nicely as investor confidence in a recovery has shot up.

Several of the best performing stocks are sporting relatively high valuations. Expedia is selling at 43 times 2004 projected earnings per share, while Yahoo is trading at 56 times 2004 earnings. The top 25 performers trade at an average of over 33 times 2004 earnings per share, and the 25 largest tech stocks trade at more than 24 times 2004 earnings. In comparison, the S&P 500 index trades at about 16 times 2004 earnings. Some of the premium relative to the S&P 500 is justified by the fact that earnings at most technology companies will grow faster than their industrial counterparts. But the prices of most tech companies seem to fully anticipate a reasonably strong recovery in profits.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.

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