Risk has re-entered the tech stock trading room. Whether you define risk as "volatility" or as "loss of capital," there has recently been a lot of it in the market.
By early morning, the
Nasdaq Composite Index
was down 161.1 points, or about 4% on the day. By midafternoon, the Comp was almost back to even before once again sliding deeper into the red. The tech-stuffed index has lost nearly 20% since peaking March 10.
No matter where stocks close today, this is the razor's edge market that can cut you up in a flash. There are already signs of bleeding:
- Motorola (MOT) last night lowered its earnings estimates for the year and today saw its share price free-fall more than 29 before stopping around 121, well off the all-time high of 184 5/8.
The first aggressive growth stock fund to self-destruct has surfaced.
CNBC reported yesterday that
Foxhound Fund, run by
Bulldog Capital Management in Clearwater, Fla., has lost close to 90% of its investors' money, turning about $400 million into $40 million in a few months.
And there are worries of more bloody days ahead.
reported this morning, in a survey conducted by
, that U.S. investment managers are "raising cash as technology shares fall from grace." Momentum investors seem to have lost courage. Value investors, who might want to buy companies with P/Es closer to their earnings growth rates, wait for still-lower prices or invest instead in cheaper old-line companies. Meanwhile, more tech stock comes to market and additional IPO lockups expire. There are rumors in the market of momentum investors increasingly shorting their once-beloved tech stocks. Traders talk of the Comp "converging" with the well-dented
. (By midafternoon, the Dow was still holding onto a 1% gain.)
Where might the tech train be heading? Is the decline simply a valley before the market climbs, fueled by good first-quarter earnings announcements? Or is the decline a harbinger of disaster just around the bend? Or is the train stuck in a trading range? No one knows.
What Must Go Right?
An investor can, however, know one thing about the tech stocks he or she owns: What has to go right for my highfliers to make me the money I want?
The arithmetic is pretty simple. Take
, the ultimate tech bellwether of the moment, for example.
Cisco has a market value of about $500 billion, excluding stock options. This year after-tax earnings are expected to be about $3.5 billion. The stock trades at about 140 times earnings. Let's say you the investor want to make a 20% average annual compound rate of return over the next 10 years. What has to happen? Cisco's net income must grow at slightly more than 24% a year, and in year 10, Cisco must sport a P/E ratio of 100. That is just to make the 20% return you want.
If you are 100% confident that Cisco will grow earnings at 24% a year and end up with a P/E of 100, you will make 20% a year on your money. If you are sure Cisco can do that, then keep on with it. If not, then you should re-evaluate holding Cisco. (If Cisco can leap such high hurdles, its market cap in year 10 will be $3.1 trillion. That equals roughly 20% of today's
U.S. public equity value.)
You can perform the same simple calculation on any stock or stock index in your portfolio. In this risk-laden market, perhaps you should. At the moment, the Comp is slipping again.