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Nothing Landing on Tech Heavyweights

Investors find reasons to keep buying in IBM, Intel reports.

The absence of bad news continued propelling top speculative names forward Wednesday as investors looked past some pretty dodgy numbers, and anthrax, and found reason for optimism.

After raising red flags in the run-up to two of the biggest tech earnings reports of the quarter, even skeptical analysts were heartened when IBM said the fourth-quarter consensus is looking reasonable.

While both


(IBM) - Get International Business Machines Corporation Report



met deflated expectations of analysts who followed them, it took fairly selective interpretation to see reasons for optimism in their reports.

"They confirmed their prior guidance, which in the current environment is seen as indication that their model is more resilient than their competitors'," said Joel Wagonfeld, an analyst at Banc of America Securities. Wagonfeld also said he found IBM's assertion it was gaining market share in certain business segments bullish. "They're saying their competitive positioning is stronger, and so when things turn around, they'll continue to benefit, even though they're already benefiting on a relative basis in a difficult environment."

IBM's earnings, which topped analysts' lowered expectations by a penny, fell almost 20% in the third quarter on a 6% decline in overall sales. In its once-spectacular disk-drive and semiconductor segment, sales skidded 27%, reflecting weakened worldwide demand for the basic components of personal computers. IBM's own personal computer segment posted a loss on a 28% revenue decline.

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But in what is becoming the

de rigueur

reaction to everything short of bioterrorism, investors concentrated on the nuggets of good news in the report: primarily, the company's refusal to lower guidance for subsequent periods and the bullish tone of management. On a day when terrorist threats were weighing on the averages, shares of IBM were recently up 4.3% to $105.80.

Short-covering is almost certainly part of the reason for the uptick, said Wagonfeld. A fair amount of short players expected the company to miss third-quarter earnings or lower future guidance.

In Intel's case, profits all but disappeared, falling to $106 million from more than $2 billion last year. The company also warned of a tough Christmas quarter and eased off previous estimates that revenue would be higher in the second half than it was in the first.

Again, investors found reason to be cheerful in Intel's ability to meet its estimate for pro forma earnings and the slight rise it reported in its processor business. The shares were up about fractionally in early trading, extending a run that had the stock up almost 30% from its post-attack low.

"I think people are becoming more comfortable with the idea that IBM has continued to weather storm in an extremely impressive way," said Peter Boockvar, equity strategist at Miller Tabak. "And with Intel's numbers, people are sensing that the worst is over. After two years of selling tech stocks, most people are underweight and if things have really bottomed people need to reallocate money into tech stocks again."

Steven Goldman, markets strategist at Weeden, agreed, saying extreme pessimism in the market has now shifted to a growing sense that "maybe things aren't as bad as expected." IBM's earnings "kind of adds credibility that we're nearing bottoming process for fundamentals," said Goldman. And since stocks usually anticipate events six to nine months beforehand, "we're maybe nearing the bottoming here on a fundamental basis."

Some still advocate caution. Goldman Sachs' Laura Conigliaro raised her fourth-quarter earnings and revenue expectations for IBM, citing higher software revenue and associated margins, and maintained her recommended list rating on the stock. But, she added, "We expect the economic environment to weigh heavily and, at the very least, create two very different halves of the year in 2002."

Banc of America's Wagonfeld isn't changing his fourth-quarter estimates for now. "I think our number is conservative as there still is uncertainty and we don't know exactly how the quarter's going to play out." The analyst, who expects IBM to post fourth-quarter earnings of $1.30 a share, has a buy rating and a $120 price target on the stock.

As for the market, "nothing's straight up," said Goldman. "The damage is still in the market. You'll still have rallies and consolidations. This hasn't changed things, but hopefully the sting of selloffs won't be as prominent."