You're scrubbing down after a long, lousy year for PC stocks. But you just can't hide that smell.

Shorting Against the Boxxies
PC stocks plunging

PC investors came to consciousness in 2000.

Blowups by

every

major

manufacturer of

personal

computers disabused them of Edenic growth expectations and led them into a sobering postlapsarian world. The long-awaited secular slowdown of the personal computer market is finally at hand. Organic growth waning, the battle for market share can only get more brutal, and the inventories left by a lackluster holiday shopping season bode ill for profit margins. PCs, it turns out, are a lot like automobiles. And that's not good in a slowing economy.

"A lot of it is a macroeconomic call," says

Bear Stearns

analyst Andy Neff. "Watch the euro. Watch oil. Watch interest rates. Of course, if things slow, they don't start again quickly. But if the indicators change, it could be positive for the sector."

Sitting and Waiting

Nothing to do about that but sit and wait. In the meantime, absent any catalyst that can reverse the recent trend of

multiple contraction across the market, PC stocks can only hope to tread water for the first half of 2001. The first and second quarters are typically the most sluggish in any year, much less a year in which growth is decelerating. Thus it's hard to imagine that, in that period, companies will be able to come forward with evidence that demand is coming back, much less get anyone to believe that evidence.

"I wouldn't be rushing to buy any of them," says

ING Barings

analyst Rob Cihra. "It will be at least another quarter or two before we get a glimpse of when this will be turning around. Lack of visibility is not good for stocks, and we're not going to get much visibility into demand or production until late first quarter of next year."

Spaghetti Western
Compaq, Dell, Gateway dropping

That's not to say you should dump what's left of your PC holdings. With the

Philadelphia Computer Boxmaker Index

down about 40% this year and 54% off its 52-week high, it's probably a little late for damage control. But the overwhelming sentiment on Wall Street, based on nothing less than what the companies themselves have disclosed, is that the personal computer business -- consumer, foremost, but corporate as well -- is a rotten one to be in right now. And though nearly every boxmaker has taken great pains to point out its decreasing reliance on the increasingly torpid desktop business, all remain exposed.

Take

Dell

(DELL) - Get Report

. On a price-to-earnings basis, it's still the most richly valued of the PC stocks -- even though it's off 72% from its 52-week high. Three years ago, back when droves of Dellionares were still terrorizing the Austin real estate market, Dell's desktop PC sales grew 47% year-over-year, according to Cihra. (Cihra's firm hasn't underwritten for Dell.) That pace fell to 37% two years ago. Last year it slowed again to 24%, and this year it's likely to come in around 10%.

Bowing and Scraping

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Click here to see Monday's, Tuesday's and Wednesday's features

In the new fiscal year, most analysts expect Dell's desktop PC revenue will grow 1 or 2 percentage points shy of 10%. And with the desktop PC segment making up more than half of the company's total sales, Dell could have to

scrape to meet its newly lowered target of 20% annual revenue growth.

"With the majority of your revenue decelerating at that kind of rate," says Cihra, "you need the enterprise business to grow very rapidly. I mean, if half your business is growing at less than 10% next year, which is what one would have to expect, the other half would have to grow a heck of a lot faster. So that 20%

target is a stretch."

The long-term key to Dell's success as a growth stock lies in low-end servers and storage devices, markets growing much faster than that for PCs, but commodity businesses where price-cutting could get brutal. Competitors like

Hewlett-Packard

(HWP)

,

Compaq

(CPQ)

and

IBM

(IBM) - Get Report

face similar conditions in the higher-end markets for servers and storage, crowded spaces where they'll bump heads against one another and more focused infrastructure firms like

Sun

(SUNW) - Get Report

and

EMC

(EMC)

. All this as corporate spending on information technology slows.

Look on the bright side. "When everyone's making money, they all get punch drunk," says Bear Stearns' Neff. "They think they're smart, not at the top end of a cyclical business. If they start losing money, they get disciplined. That can be healthy."