Why the Shift in Tech Was So Swift

Also, Blue Rhino's disclosure, Hewlett-Packard and Stewart Enterprises.
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-- screech!


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-- crash!



-- boom! Coulda, woulda, shoulda seen


tech wreck coming. The warnings were all there. This column has been over that ad nauseum.

But why was the actual -- or perceived -- decline so swift and why did so many money managers ignore the warnings?

"It's the most stunning 180 I've seen since I've been in this business," says one of this column's regs, Jeff Matthews of


, who keeps in regular touch with sources throughout the distribution channel.

Over the past three or four months, in our regular conversations (many of which have been relayed in this column), Matthews has been unwavering in his belief that the techs, especially those tied to PCs, were on the verge of doom, despite the widespread belief to the contrary.

So, why didn't everybody else figure it out? Just call it the ultimate fake out. Investors got lulled into thinking PCs are more than just commodities -- commodities whose prices are rapidly falling, at that. And it's no wonder: After clearing its stuffed channel, Compaq was back to building,


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was saying biz was great, Dell was chirping that things couldn't be better.

"Everyone starting thinking in PC land that it was having some kind of sustained, massive growth," Matthews says.

There's a good lesson here: Just because manufacturers were saying biz was booming didn't mean demon-like demand would extend beyond Christmas. What's more, the pickup in demand by companies trying to replace old equipment to become Y2K compliant has all but ended. Adding to the misery, the marginal PC buyer couldn't give a hoot about

Pentium III


Pentium II

. All they care about is buying a box as cheap as possible to get online.

While the herd went one way, square pegs like Matthews make their living going the other.

"That's why this is such a wonderful business," he says. "If you think about stuff, you can figure out what's really going on when everybody thinks the emperor is wearing clothes. It happens once a year. The greater the buy-in of the story, the greater the trend reversal it is."

And what a reversal it has been.

Short Positions

  • Much ado about nothing: Yesterday's split of Hewlett Packard (HWP) isn't likely to help it shed its growing image as the Baby Huey of the computer industry. (Watch me live to eat my words!) The spinoff of its test and measurement and medical products businesses is reminiscent of 3M's (MMM) - Get Report spinoff a few years back of its data storage businesses into what is now called Imation (IMN) . (Yawn.) Great opportunity. Lousy execution. Neither Imation nor 3M subsequently have done much more apart than they did together. 3M is still scrambling.
  • Death watch: A recent item here on Stewart Enterprises (STEI) , a rollup of funeral homes and cemeteries, pointed out how the company disputed industry leader Service Corp.'s (SRV) - Get Report warning that its biz was, uh, dead because the death rate was falling. Shortsellers, meanwhile, had insisted that Stewart was worth, at best, 2 1/2 per share. Stewart subsequently sold additional stock to the public at 16 3/4, and its stock initially rose before getting pulled down with the rest of the industry. It closed yesterday at 14 3/4. Along comes rival Loewen Group (LWN) , which on Monday sold a variety of properties, including 124 cemeteries, for $193 million. That equals an average $1.56 million per property. That just so happens to be what Stewart itself paid for the 425 cemeteries and funeral homes, more than half its total holdings, that it bought over the past two years. Multiply the company's 700-plus properties times $1.6 million, back out the debt (around $900 million), add back the cash from the recent stock sale ($219 million) -- as one of this column's solid shortselling sources has done -- and you get a per share valuation of a heck of a lot lower than 14. How does somewhere between 3 and 5 sound? Sounds right to the shortseller. A Stewart spokesman, who snarled about this column's previous items, declined comment other than to refer me to Loewen and the buyers of its properties. Couldn't get the buyers, but a spokesman for Loewen said it felt it got a good price considering the death spiral in prices for funeral homes and cemeteries.
  • Auditor anxiety (gas pains): It's always a red flag when a company fires an auditor. That's especially true if the dismissal comes right after the company yanks a planned stock offering. So, here we have Blue Rhino (RINO) , a rollup of companies that fill propane gas cylinders like the ones used in backyard gas grills. The company disclosed last week, when it announced its annual earnings, that that slouch outfit known as PriceWaterhouseCoopers, or PWC, had been canned. The reason offered on a conference call with analysts was that PWC had been unresponsive and delivered poor service. Blue Rhino, which has been under fire by shortsellers for alleged aggressive accounting, also didn't like PWC's insistence that Blue Rhino expense rather than capitalize some takeover-related R&D expenses. (In fact, according to Blue Rhino, the PWC method here would have been the more aggressive approach.) Besides, a new partner on the account "wanted to understand the treatment of everything," CFO Mark Castaneda said. Which brings us to last Friday, after the market closed, when nobody usually cares about anything: Blue Rhino's 8-K, with details about the auditor's firing, finally hit the SEC's database. (There was no press release; the company says it wasn't warranted.) While the 8-K stated that there were no disagreements on accounting principles or practices, etc. (despite what was said in the conference call!), Blue Rhino included a thick paragraph that said PWC had notified Blue Rhino of two items, at the time of its firing, "which, depending on the results of the review that was not completed, may have a material impact on the fairness and reliability of financial statements" for previous quarters. The first issue had to do with the "useful life" of gas cylinders acquired by a company with close ties to PWC. The second item had to do with "appropriate accounting for certain acquisition costs related to customer accounts." PWC declined comment yesterday, but Castaneda said the only reason those two items were left hanging was because PWC hadn't gotten around to them, and refused to review them after they were dismissed. He says those items will be handled by the new auditors. Blue Rhino investors might want to see if Blue Rhino can snare a Big Five firm (or however many there are these days). PWC, for its part, has a policy of not going to work for companies that previously fired auditors.
  • Finally: An item here Tuesday lampooned this very column for the mention several months ago of National Music Retailers. Huh?! It was such a bowser that my brain refused my fingers the right to use the correct name: National Record Mart. Double arf!