Tech Stock Sale: Hey, It’s a Spring Thing

If it’s spring, it must be . . . time to sell technology stocks.

The tech group suffered a broad decline last week, ostensibly sparked by the federal government’s failure to harshly punish alleged South Korean semiconductor “dumping.”

But some analysts say the Korean decision just gave smart investors an excuse to do what they almost always do at this time of year: bail out of tech stocks.

The NASDAQ industrial stock index, which is heavy with technology issues, closed at 702.64 on Friday, a drop of 1.1% for the day and 2.6% for the week. From its peak of 757.05 earlier this year, the index has so far tumbled 7.2%.

In contrast, the broad NASDAQ composite index is off just 3.7% from its high, and the blue chip Standard & Poor’s 500 index is down a mere 1.3% from its peak.

Why do tech stocks usually plummet in the spring? Blame it on the industry’s product cycles--and on human nature.

Each autumn, the industry gets Wall Street excited about new computers, software and enhancements on deck for the coming year. Analysts optimistically boost their earnings projections. Investors begin to take notice of the stocks.

Then, in the fourth quarter, business and consumer spending on computers and related products typically soars, as capital-spending budgets are depleted and as individuals buy for the school year and for Christmas. The stocks zoom.

By spring, however, spending on tech products often slows. Even if it doesn’t, earnings expectations for many firms become overambitious by this time of year, as analysts extrapolate fourth-quarter successes. The stocks, pumped up with hype, frequently have nowhere to go but down.

This cycle has been the rule more often than not over the last 10 years. You’d think by now that most investors would anticipate it. But as some recent tech bombshells have proved, people often cling to the idea that their tech stocks will be OK at this time of year--until shown otherwise.

Two signs of trouble:

* On March 8, Compaq Computer slashed prices of its personal computers up to 20%, a move quickly matched by IBM, Advanced Logic Research and other competitors.

Price cuts are nothing new in the PC field, of course. And in fact, continuous discounting last year produced record PC sales and big profits for many competitors, who made up on volume what they lost in discounts.

But investors appear far more concerned about this latest discounting wave and its potential effect on PC firms’ earnings: Shares of Compaq, Apple Computer, AST Research and other PC giants are down 18% or more from their highs earlier this year.

* Over the last two weeks, several makers of key computer components have projected disappointing first-quarter earnings. Example: Irvine-based Western Digital, a maker of disk drives (devices that allow data to be stored and retrieved on PCs), said last Wednesday that quarterly results would be “significantly” below estimates. Its stock sank 31% for the week, to $5.625 on Friday.

Like other disk-drive makers, including Conner Peripherals and Maxtor Corp., Western Digital contends that increasing price competition is a function of excess capacity within that industry--not an indication of slowing demand for computers. “We’re not seeing any significant decreases in unit demand,” Western’s president, Charles Haggerty, said last week.

But some analysts are growing suspicious of still-glowing computer sales projections. “All of these companies suggest that demand is not the problem--that these are company-specific problems,” said Bruce Lupatkin, analyst at brokerage Hambrecht & Quist in San Francisco. “But I think unit sales volume is slowing.”

Lupatkin surmises that the promise of higher income tax rates under “Clintonomics” is already clipping consumer and business spending, and that the most depressive effects of the Administration’s economic plan lie ahead.

What’s more, some computer shoppers are likely to delay purchases until later this year, awaiting PCs based on the next generation of computer chip: Intel Corp.’s Pentium, successor to the 486 chip. Intel will offer its first big preview of Pentium today.

Admittedly, though, speculation about a slowdown in computer sales remains just that. The bulk of the evidence suggests that business remains healthy across the broad spectrum of technology.

While some computer parts makers are suffering, for example, National Semiconductor on March 11 reported a 73% jump in earnings for the quarter ended Feb. 28. It also said that profit margins this quarter already look better than last’s, thanks to record orders.

Other tech niches also continue to show powerful sales growth. Marc Klee, manager of the John Hancock Freedom Global Technology stock mutual fund in Boston, said one of his favorite industries is relational database software--the systems that allow companies to retrieve and manipulate data from a broad range of linked machines, from mainframes to PCs. Oracle Systems and Sybase Inc. are two major powers in that software field.

The allure, Klee said, is that new database software provides businesses with a way to make their frequently disparate computer systems do more. With corporate budgets still tight, “we’re interested in any area of technology that lets computer users leverage-up their existing systems,” he said.

Likewise, Klee remains bullish on Newbridge Networks, one of the hottest new suppliers of computer networking systems. At $55.25, Newbridge stock sells for 26 times the $2.10 a share that Klee believes the company can earn in the fiscal year ending April, 1994. For a company expected to grow 35% a year through the mid-1990s, he contends that the stock “hasn’t yet caught up with the realities of this company.”

Nick Moore, a senior analyst for the San Mateo-based Franklin Dynatech stock mutual fund, which specializes in tech issues, concedes there is good reason to be optimistic about the future of networking firms, database software suppliers, semiconductor makers and a host of other tech sectors.

“Long term, I’m an unrepentant bull on the computer industry,” Moore said. “I think this business is still in its infancy.”

But he admits that he is wary about most tech stocks at current prices. “I would say valuations of these stocks are extremely high,” Moore said, given the group’s huge rally since the fall. And historically, he notes, fighting the seasonal weakness of the tech sector in spring is usually a losing battle.

“I just think that by midsummer, I’ll be buying these stocks a lot cheaper,” Moore said.

Tech Stocks: Spring Selloff Begins? Technology stocks have a history of peaking in winter, then plummeting in spring and early summer--and the pattern looks like it’s repeating.

52-week Fri. close Pct. drop Stock (market) high/low and change from high Intel Corp. (O) 121 1/4-46 1/2 113 3/4, -2 -6% Motorola (N) 66 1/2-36 3/8 62 1/2, -2 1/4 -6% Oracle Systems (O) 36 7/8-12 34 5/8, - 7/8 -6% Cisco Systems (O) 96 1/2-33 89 3/8, -1 5/8 -7% Newbridge Networks (O) 60 1/4-13 5/8 55 1/4, +1 1/4 -8% Sybase Inc. (O) 62 1/4-21 56 1/2, -2 1/4 -9% Microsoft (O) 95-65 1/2 84 1/4, -1 -11% Computer Associates (N) 27 3/8-10 7/8 22 5/8, -2 -17% Apple Computer (O) 65 1/4-41 1/2 53 3/4, - 3/4 -18% Compaq (N) 58 1/2-22 1/4 48 1/8, -1 5/8 -18% Intl. Rectifier (N) 13 7/8-7 3/8 11 3/8, unch. -18% Conner Peripherals (N) 25 1/2-16 1/8 16 3/8, - 3/8 -36% Lotus Development (O) 38 1/4-14 3/4 24 1/2, -2 -36% Cirrus Logic (O) 39 3/4-16 1/4 24 1/4, -1 7/8 -39% AST Research (O) 24 1/4-11 1/4 13 1/2, - 1/2 -44%

Markets: N -- NYSE; O -- NASDAQ