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Hardware Investors Get the Y2K Willies

An analyst's downgrade of Sun and Hewlett-Packard could be the start of millennial mayhem.

PC stocks swooned Tuesday after

Banc of America Securities

analyst Kurt King downgraded

Hewlett-Packard

(HWP)

and

Sun Microsystems

(SUNW) - Get Sunworks, Inc. Report

to hold from buy. The move sent shudders through the sector, pushing Sun down 6.3%, H-P down 4.4% and

IBM

(IBM) - Get International Business Machines (IBM) Report

down 3.5%.

King's move was based on the companies' presumed exposure to the Y2K problem. The problem is related to computer systems' inability to reset their internal clocks to 2000 from 1999. Despite costly precautions, many observers are still worried about the millennium bug's effects, and pessimists warn that a string of downgrades in the sector could panic investors, sending stocks plummeting.

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Dennis Grabow, founder and CEO of

Millenium Investment

, a Y2K-focused money management firm based in Chicago, says the investment community has created a "kiss-of-death" attitude toward execs foolish enough to even breathe about Y2K. "I expect to see a lot more analyst reports like the one we saw today," he says. "Companies have just not been forthcoming talking about it." Grabow has currently no positions in IBM, Sun or H-P.

Banc of America's King surveyed 50 large companies and found that slightly more than half plan to cut fourth-quarter information technology spending by between 10% and 80%. Last month,

Soundview

chief strategist Arnie Berman warned that the Y2K problem could lead a significant number of companies to significantly reduce IT budgets during the second half. "The attitude will be if it ain't broke, don't mess with it," he says. Banc of America has done no recent Sun or H-P underwriting.

Sun's experience after warning in April of a Y2K-related growth slowdown may well be silencing other executives. Those fears sent its stock sliding to around 50 from 70. On Tuesday King said

Unix

-based systems were most at risk, and that's why Sun and IBM, the two largest Unix vendors, were badly hit: Sun closed down 3 11/16, or 6%, to 56. H-P fell 4 3/16, or 5%, to 90 1/8 and IBM dropped 4, or 4%, to 112.

"Unix-based servers are often the guts of any organization and those are the first things that are going to get locked down during Y2K," says Kazim Isfahani, a Y2K industry analyst at the

Giga Information Group

.

If more analysts hop on the bandwagon, then investors should expect to see hardware stocks catch a summer chill thanks to the Y2K bug.

Editor's Note: Palo Alto, Calif.-based H-P continues its wooing of Wall Street Wednesday when its executive team meets with analysts in New York to discuss its emerging e-services Internet strategy.