PC Makers' Stocks Ring In New Year With Best Month in Years

They warn and lower guidance. They warn again and lower their lowered guidance. But personal computer stocks have just completed the best monthly performance they've had in years.

Boxy Music Dell and the boys with a torrid January

It's true. The Philadelphia Stock Exchange Computer Boxmaker Index gained 28% in January. That's the best monthly performance the BMX has put together since the Philly exchange created the index in April 1998. The index includes stocks like Dell (DELL), Compaq (CPQ), Apple (AAPL), Hewlett-Packard (HWP) and Gateway (GTW), all of which have blown up in the last few months as a result of what company executives described as a sudden, unexpected deceleration of demand.

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Observers have a number of more or less plausible explanations for the rally. The stocks, which had been crushed in the final four months of 2000, were simply oversold. Michael Dell buoyed sentiment in early January by buying his company's stock for the first time since 1992. Aggressive price-cutting campaigns seem to have gotten channel inventories down to more normal levels than the industry has seen in months. And, most important, the Federal Reserve is working like mad to reanimate the consumer and corporate purchasing that died sometime last fall, reinforcing PC bulls' hopes that 2001 will be saved by a second-half recovery.

"It's blowing me away," David Bailey, a Gerard Klauer Mattison analyst, says of the month-long surge in PC stocks. "People are assuming that the rate cuts are going to save everything."

Blowing You Away PC stocks romp as growth moderates
Company	Year-to-date performance	Forward price-earnings ratio	Estimated 2001 sales growth	Estimated 2001 earnings growth
Apple (AAPL)	+42.0%	N.A.	-25%	N.A.
Compaq (CPQ)	+56.5%	20.3	6.4%	21.9%
Dell (DELL)	+48.7%	29*	16.1%*	5.8%*
Gateway (GTW)	+15.2%	16	.01%	-2.2%
Hewlett-Packard (HWP)	+16.8%	22	7%	1.7%
IBM (IBM)	+34.2%	23	7.5%	12.3%
Source: Multex.com *Based on Dell's fiscal 2002 estimates.

The newfound optimism over PC stocks begs caution, though. Inventories may be down, but PCs continue to sell at rock-bottom prices. Dell is probably to blame for that problem. Thanks to discounting, the company's unit shipments grew 40% last quarter, about four times the industry rate. With component prices still dirt cheap, Dell isn't about to stop using its lean business model to keep prices down in the fight for market share.

Meanwhile, even with the Fed's easing, the thesis of a rebound in the second half of 2001 remains tentative. No PC company has yet made a strong case that demand is back. At Apple's analyst meeting Wednesday, in between demonstrations of how to digitize the B-52s' Love Shack using the company's new iTunes software, CEO Steve Jobs went so far as to describe the U.S. economy as "melting down." Indeed, thus far, the situation is reminiscent of 2000, when the conventional wisdom was that corporations' adoption of Windows 2000, coupled with the normal holiday consumer buying spree, would deliver a second-half boom. That boom, of course, never materialized.

"I'm optimistic on the second half," says ABN Amro analyst Bill Shope. "It won't be like early 2000 or early 1999, but it will certainly be better than the first half. But I wouldn't say it's certain. You have to be careful."

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