Embracing Mediocrity, Tech Investors Sing a Hopeful Tune

Here's what passes for good news on technology stocks these days: The bad news isn't looking as bad anymore.

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That's what shell-shocked tech investors are saying as they comb through the past week's earnings news, searching for signs that this week's tech rally is more than a mirage. The Nasdaq Composite tech barometer, down about 1.5% Friday morning at around 2150, zoomed 13.5% over the prior two days, following Wednesday morning's surprise Fed rate cut.

Sure, Internet companies are complaining about poor visibility and manufacturers are struggling to figure out just how far the demand for their products has dropped. And, like poor souls caught in a hurricane, people are powerless to judge the worst moment in the storm until they gain the luxury of hindsight.

But still, some see signs that bad news -- in the form of earnings shortfalls, preannouncements and estimate cuts -- isn't as bad as it used to be. And that, they say, isn't far from a state of affairs in which the bad news is superseded by news that's merely mediocre -- a welcome occurrence these days.

The Long View

"Fundamentals don't have to improve for stocks to go up," says Perry Boyle, director of East Coast research for Thomas Weisel Partners. "They just have to stop getting worse."

Jumping Nasdaq's spring thaw

Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray, says a broad look at financial forecast revisions indicates that good times are somewhere in the vicinity. "The net number of downward revisions is slowly beginning to decrease," he says. "It's that type of relative improvement that smells of an earnings trough."

Adds Belski, "Are companies still revising estimates lower? Yes they are. But are they going down as much as they were? According to our work, no."

Over the past week, Belski sees as relatively positive indicators the "mature" and "credible" expectations from companies including Intel (INTC Quote) and Cisco (CSCO Quote). "It wasn't grandstanding," Belski says. "I think people can feel better about what's going on in the market."

Boyle sees from Intel's and IBM's (IBM Quote) reports this week that the PC sales cycle is bottoming out.

Good Week Nasdaq over five days

The Retest Theory

Looking for a rebound in the September quarter, Boyle says that in the absence of another rate cut or other major news, stocks may tread water for a while or even go lower, but doubts they will go below the levels they hit on early April lows. Not setting new lows is a reversal of the trend started in early 2000 in the Nasdaq -- thus an example of how good news may be not much more than the absence of bad.

Ray Rund, director of research for Shaker Investments, sees good news in the less-bad news in the semiconductor sector that he follows. Based on what he's seen, the sequential drop in semiconductor revenues from the fourth quarter of 2000 to the first quarter of 2001 has been about as large as any sequential drop has ever been. Yet the dropoff from the first quarter of 2001 to the second quarter doesn't seem as bad. "Maybe that does signal that we're hitting the bottom for the world semiconductor market in this cycle," Rund says. "I think the rate of worsening is lessening, simply because things got so bad so quick."

One good sign: Microsoft's (MSFT Quote) announcement after Thursday's market close that it beat lowered estimates for the March 31 quarter, essentially matching forecasts that had been in place before January jitters inspired lower expectations.

Hard to Find

Yet, broadly, few people are saying things are clearly on the rebound. Companies' visibility into 2001 may be better than it was at the beginning of the year, says John Corcoran, Internet/digital new media analyst at CIBC World Markets. But that's only because we're further along into the year, he says.

In its conference call Thursday night, Sun Microsystems (SUNW Quote), which slashed estimates in February, continued to vacillate on the visibility issue.

In another sign of how poor visibility continues to be, Shaker's Rund says companies with inventory backlogs don't appear to know how much time worth of inventory they have, because they have no idea of at what rate customers will be buying. "I don't think people really have a handle on what the usage rates are like going forward," he says. Bearing out his observation, executives at Nortel (NT Quote) -- which Rund didn't refer to -- on a Thursday evening conference call were unable to quantify what should be their "normal" inventory level, since they had no idea what their future sales might be.

So have tech stocks hit the market bottom? It's impossible to tell, of course. Corcoran says despite the bits of good news this week, it's premature to call a trough in earnings. "We will only know with hindsight," he says.

He also says that the sharp up-and-down moves of recent weeks, such as Wednesday's rate-cut-fueled rally, aren't indicative of a healthy market. "We're still in this environment where eveyone's walking around on eggshells," he says.

Despite the difficulty of calling the bottom, people will try. For a sign that the bottom has been hit, Boyle points to the staggering $2.5 billion inventory writedown that Cisco announced earlier this week. "They say that no one blows the whistle at a market bottom," Boyle says. "Maybe somebody did this time."