Technology Stocks Keep Jumping, but the Semis Bear Watching

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By Amy Olmstead
Staff Reporter

As the masses cheer

Dow

8000, Wall Street continues to marvel at the powerful surge in technology stocks.

Lost in the hoopla of the Dow's strong move: The technology-stuffed

Nasdaq Composite Index

has set 10 consecutive records, led by stalwarts

Intel

(INTC) - Get Report

and

Microsoft

(MSFT) - Get Report

. Narrower tech measures, such as the

Philadelphia Stock Exchange Semiconductor Index

and the

Morgan Stanley High-Technology Index

, have also gained sharply. And when technology is sprinting, investors find themselves grinning.

Throughout this raging bull market, technology stocks have played an instrumental role in driving prices higher. Corporations, hungry to retool their technology infrastructure, have purchased prodigious amounts of computers and software. The networking craze has added another leg to the technology boom. Consumers have joined in, making computers another must-have appliance in the home. And much of this technology revolution now finds itself gaining ground in largely untapped overseas markets.

During the past two years, as their influence on the market has soared, technology stocks have played the role of both good and evil. One major player will shock the market, only to find a cousin save investors a few weeks later. That scenario unfolded last summer when

Hewlett-Packard

(HWP)

, among other tech firms, warned of softer sales and weak earnings. The stock market went into a death spiral. Just a week later, in came Intel to save the day. The powerhouse chip maker reported strong second-quarter earnings, and suddenly the stock market jumped back on the positive track.

In the past several weeks, technology has again laid the groundwork for a powerful, broader market rally. Strong earnings from the semiconductor sector -- the most basic building block in the group -- and rosy projections from PC makers turned a lousy June into a blissful July. The traditional midsummer technology slump seems to have ended after only a brief downward dance, leaving the bulls in firm control of the market. The so-called secular bullish case in support of technology shows little hint of waning.

"The bullishness is warranted," says Sarah Bernstein at

Kaufman Brothers

, who attributes some of the optimism to a collective relief from earlier concern about a possible drop in PC sales -- a concern she didn't share.

In the wake of the technology stock sprint, analysts believe the second half of 1997 will continue to produce strong results. Megan Graham-Hackett of

Standard & Poor's

says a boost in foreign sales and in the enterprise computing market should give tech another goose. She is, however, less certain about how the consumer will behave.

Amid the hoopla, even the zealous analysts see some reasons for concern. Graham-Hackett says that while stocks are not overvalued, they are certainly close to full value. "They have appreciated quite a bit and are nearing my price targets," Graham-Hackett says.

Cisco

(CSCO) - Get Report

and

3Com

(COMS)

, two networking powerhouses, have about 10 points to rise before hitting her year-end targets. At this pace, they'll be there before August.

Kaufman Brothers' Bernstein adds that the bullish outlook for PC makers for the second half of 1997 isn't universal. Price-cutting efforts will squeeze out some of the smaller players as the industry consolidates.

And in the chip industry -- often seen as an early indicator for overall technology demand -- all has not been perfect.

Advanced Micro Devices

(AMD) - Get Report

-- a major Intel competitor -- missed

First Call

estimates of 22 cents a share by 15 cents last week.

Cyrix

(CYRX) - Get Report

also missed earnings Wednesday after the bell. Its loss of 27 cents per share was 7 cents below expectations. Thursday, French chip maker

SGS-Thomson

(STM) - Get Report

reported 66 cents per share and slightly beat expectations a month after analysts dropped estimates by 20 cents on an earnings warning from the company.

"Put it all together and it's a very mixed picture," says Bill Milton, a semiconductor analyst for

Brown Brothers Harriman

.

Semiconductor companies are in a turbulent upswing that began in the third quarter of last year. Milton says that while semiconductor busts can develop quickly, the recovery usually takes at least a year. The

Semiconductor Industry Association

predicts only 4.6% sales growth in 1997. That's up from about a 9% decline last year -- but down by half from estimates earlier this year.

As technology keeps charging, the volatile semiconductor industry could be a place to watch for any potential reversals.