Mad Dash to Nasdaq: Solectron's Slowdown Offers a Glimpse Into the Day After

Growth remains strong, but how institutions react to a shortfall will be far more telling for this stock.
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If a butterfly flapping its wings in Australia can lead to a hurricane in Zanzibar, can a single revenue shortfall derail a red-hot growth story?

Shareholders at highflying

Solectron

(SLR)

and other contract electronics manufacturers may soon find out.

Solectron, whose stock has more than doubled this year on heavy interest from institutional investors, saw its shares slide 9% Tuesday on a revenue shortfall. On Monday, Solectron met earnings expectations for its first quarter ended last month but said revenue came in some $100 million light, as order growth failed to compensate for increased inventories. Fears of capacitor shortages drove a broad electronics selloff Tuesday:

Jabil Circuit

(JBL) - Get Report

,

Flextronics

(FLEX) - Get Report

and

Sanmina

(SANM) - Get Report

all slid around 10% in heavy volume.

Now, watching Solectron's big institutional holders could provide an interesting case study in tech-stock momentum. Though retail investors and daytraders are often cited as driving the tech-stock frenzy that underlies the

Nasdaq's

stunning 64% rise this year, this rally is also a story of institutional money chasing performance, and chasing largely unheard-of stocks up the charts to dizzying heights.

Strong Following

Solectron has a strong following among institutions, including

Fidelity

parent

FMR

and

Equitable Cos.

, each of which owns 15%, and

Montag & Caldwell

, which holds 8%. The Milpitas, Calif., concern, which does outsourcing work for PC, telecommunications and networking equipment companies, has benefited throughout 1999 from a large uptick in demand for electronic manufacturing services around the globe.

Early word is that the big boys -- after Tuesday's round of "shoot first, aim later," says Paul Meeks, a senior portfolio manager at

Merrill Lynch Asset Management

-- are staying put. "Northern Trust will not be selling Solectron," says Ken Turek, a portfolio manager of

Northern Trust's

(BFGAX)

Focus Growth fund, which has Solectron as a core holding.

But shareholders and analysts said the same thing about

Dell

(DELL) - Get Report

after its own revenue shortfall this February. Since then, you'll find that onetime superstock pointedly absent from the list of go-go tech stocks. Now the question is whether Solectron investors will resume their buying spree or let the stock slide into the vast ranks of the laggards.

Tough Act to Follow

"We've been saying the market will forgive Internet names and concept stocks for missing a quarter, but for the traditional companies, it's tougher to recover," says Dan Mathisson, head stock trader at

D.E. Shaw Securities

. "Generally, stocks that get hit underperform the market over the near term."

At 50 times earnings estimates for the year ending in August, Solectron still trades at a premium to its growth rate and to competitors such as Jabil Circuit, which is trading at 46 times. Revenue jumped 59% in the last year to $8.4 billion, and management says it can hit $20 billion in revenue by the year ending in August 2001.

Thomas Weisel Partners'

Jim Savage downgraded Solectron to a buy from a strong buy rating Tuesday, saying the company may be losing market share with some of its customers and could face continued component restraints in its second quarter.

The high revenue expectations implied by company guidance during the second half of fiscal 2000 may give some investors pause, says Laurence Fong, a portfolio manager of the privately managed

Ascent Growth Fund

, who nonetheless still sees the company as attractive based on the company's 40% growth targets. Fong's firm has 6% of its portfolio in Solectron.

Retail investors won't be any help since they don't seem to get the Solectron story. The contract manufacturer's earnings may be robust, but Solectron doesn't have the high-tech cache of an

IBM

(IBM) - Get Report

or a

Lucent

(LU)

.

The Growth Question

Aside from the stock question, one big issue for Solectron now is managing growth. Just this month, the company closed a $2 billion acquisition of

Smart Modular

, a designer and manufacturer of memory cards and embedded computer products. Management has said the deal will be accretive this year and produce $1 billion in revenue this year alone. The consensus on this deal is positive since Solectron already has the necessary outsourcing contracts in place.

Still, consolidation of such a large entity could pose some transition problems for the company. A Solectron spokesman says the acquisition adds the outsourcing capabilities its customers want.

Its institutional investors, it seems, want nothing short of perfection.