Sometimes momentum just runs out of momentum.
Looking at the
miserable morning, buy-siders say they don't, for the most part, see any fundamental changes in company fundamentals -- just a change of heart that was radical and perhaps brief. Indeed, the index recovered from its heart-stopping plummet, which ended around 1 p.m. EDT with the tech-sodden measure down some 15%, to close just 1.8% lower.
Still, the Nasdaq has now given up 9.3% in two days this week and is nearly 1000 points off its all-time high, set just three-and-a-half weeks ago. Amid those falling tech stock prices, the buy side offers some unsurprising advice about the safer places in which to invest: industry leaders and firms that have good, solid businesses, not just high-concept stories.
The Happy Mondays
As the Nasdaq fell with the sickening speed of a baby carriage tumbling down the Odessa steps, one fund manager, speaking on condition of anonymity, said nothing had really changed. "I don't think you have had any fundamental changes, because you haven't had any companies come out and announce anything," the East Coast fund manager said. "People just woke up ... and realized trees don't grow to the sky."
Of course, there was one itty-bitty bit of
news to chew over: the release on Monday night, after the market closed, of the conclusions of law in the
case, indicating that the Seattle colossus of software had done some
very bad things
Bill Frezza, general partner at venture capital firm
Adams Capital Management
, jokes that the Microsoft case has been better than
in deflating some of the "irrational exuberance" in stock market valuations. "Maybe
is accomplishing what our
chairman has been trying to accomplish," he says. "She's certainly got everyone on edge right now."
Other factors that tech investors cited were new shares, in the form of IPOs and lockup expirations that have come onto the market; fund outflows; and the loss of momentum among momentum investors. "From a momentum perspective, you just ran out of story," said the anonymous East Coast fund manager. "The stories just got as good as they're going to get."
Oy, the Pain
David Brady, senior portfolio manager for the
Young Investor fund, says the most likely explanation of Tuesday's move lies with the momentum investors who helped drive the market up. "It's no secret they'll overshoot in either direction and not worry about it," he says.
"This is not a business issue -- this is a stock market issue," says Joe McNay, chairman of
Essex Investment Management
. "The signs are we really made a panic bottom today. That's typical of a market that gets overbought or speculative, where you set it back and clear the air with panic selling."
McNay continues, "We've had a very severe correction, and it's come very fast. In retrospect, it will be healthy, but it's painful when it occurs."
Fun With Fundamentals
David Briggs, an equities trader at
, says the performance of high-tech companies such as
Automatic Data Processing
demonstrated that investors are already beginning to show their admiration for strong fundamentals. ADP ended up 1 at 51 on Tuesday, while the Nasdaq finished down 1.8%.
McNay and others see a variety of relative bargains among falling stocks.
"I think they oversold a lot of suppliers to the telecom industry, and they oversold software suppliers to the Internet," McNay says. Among the oversold stocks, he says, were three of Essex Investment Management's holdings: B2B firm
, which fell as much as 12% Tuesday before closing up 11.2%, and hardware suppliers
, down about 24% before cutting its losses to 3.6% and
, down 17% before ending up 2.7%.
Brady pointed to two companies he bought Tuesday morning: biotech firm
, down 24% before recovering for a 3.7% loss, and B2B software firm
, which closed out at a 3% loss after falling as much as 21% earlier. "I think trends
at Rational Software are very strong," Brady says. "More money managers will realize that when they report their earnings."
Who the Cap Fits
The anonymous East Coast manager favored
, a photo-sales business that's building up its presence on the Web. "That has a real growth story, and that has real cash flow, and it's been thrown out with the Internet stocks," said the manager, who owns the stock.
Getty Images was down 3% for the day. The manager also suggested nibbling at a basket, so to speak, of Internet marketing stocks that got hit, such as
, down 8.3%,
, up 4.6% after losing more than 40% intraday, and
, which plummeted 23%. The manager owns shares in Digital Impact but not in the other stocks.
Yet the manager acknowledged the difficulty of figuring out bargains among Internet stocks: "I don't know what's oversold," the manager said in a reflective moment. "It's so hard to know for these things, which have crazy valuations anyway."
And not everybody was buying. In the early afternoon, before the Nasdaq's recovery became clear, one West Coast buy-side analyst, speaking on condition of anonymity, said, "Right now people are selling stocks -- whether it's VCs, whether it's mutual funds, whether it's people like you or me."
The buy-sider's firm was selling shares on rallies, the West Coaster said: "We're not buying ... right now."
New York Times/TSC staff reporter
Jennifer Friedlin contributed to this story.