Tech Fans Promise Autumn Rebound

While networkers and chipmakers stand to gain following this summer's selloff, Y2K could keep software stocks depressed.
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Just like

New York Knicks

fans who cried "wait till next year" after the

NBA

finals, fans of technology stocks are promising a rebound in the fourth quarter.

In the past two weeks, all but a few technology stocks have fallen from their lofty levels. Only the semiconductor companies held firm against the onslaught, but even they couldn't stem the tide by themselves for long.

On Thursday the

Nasdaq Composite Index

fell 65.83, or 2.4%, to 2640.01, but in the past two weeks the technology-heavy index has fallen some 8% from its all-time high of 2864.48. And the

Philadelphia Semiconductor Index

dropped 17.07, or 3.4%, to 492.64.

With certain nonchalance, fund managers and tech analysts are pointing to Hamptons excursions and the ogre named

Alan Greenspan

as excuses. Judging by the latest evidence, the U.S. economy isn't slowing down and the market has become jittery about the next action by the

Federal Reserve

chairman.

Chris Greer, head of Internet and e-commerce M&A for

BancBoston Robertson Stephens

, also blames daytraders cashing in on gains and a "natural shortfall and breather" that takes place after each quarterly cycle of earnings announcements. Add in the exodus of buy-siders to summer vacation spots, and you've got stock doldrums and an annual drought of IPOs. "Typically people see a rebound in the fall," Greer says. "It's a cycle that most people in the industry expect."

Alexander Cheung, portfolio manager of the

(MFITX)

Monument Internet Fund, is shocked people would be surprised by a tech stock downturn, since it happens every summer. Last year, for example, the Nasdaq dropped 20% in August. "The only question is to what extent, and on what day," Cheung says. "If people don't anticipate it, I don't know what they're thinking about," he says.

Ironically, the downturn comes, Cheung says, just when earnings reports from most Internet companies -- ranging from

America Online

(AOL)

to privately held operations -- are looking good. AOL's 13 cents-a-share profit beat estimates by two cents in the second quarter. "Business is just barn-burning," Cheung says.

Software companies, meanwhile, probably won't participate in any autumn rebound because customers, still agonizing over Y2K-related concerns, will have no interest in installing programs before January 2000. "Software companies are facing a complete freeze," Greer says. "The software industry, I think, is going to have a lot of issues between now and year end."

That goes as well for the seemingly unstoppable

Microsoft

(MSFT) - Get Report

. Just two weeks ago, buoyed by a courtroom victory against a rival software maker, Microsoft boasted a market capitalization of $500 billion as its stock price reached an all-time high of 100 3/4. It has since slipped 14% to 86 15/16 as of Thursday's close.

But if the July heat has proven too much for Microsoft,

Oracle

(ORCL) - Get Report

has blossomed.

AMR Research

analyst Bruce Richardson says Oracle could be a "very pleasant" surprise in the second half of this year as the company focuses more on the Internet. That strategy could send the stock as high as 100 by year end. Oracle finished Thursday up 3/8 to 38 1/16.

Networkers Hold Up

The promise also remains bright for the companies that help build the Internet. Although the big names among data networkers have retreated recently, it's tough to call it a rout.

Cisco

(CSCO) - Get Report

eased 1 9/16 to 61 3/4 Thursday on its typically-heavy volume of 1.4 million shares;

Lucent

(LU)

slipped 1 1/2 to 65 3/8 on 8 million shares and

Nortel

(NT)

was off 1 1/16 to 88 5/16. All three stocks are up more than 20% year-to-date, compared with a 12% rise for the Nasdaq.

The fiber-optic suppliers were particularly strong:

JDS Uniphase

(JDSU)

traded down 1 or at 87, but it had jumped 6.5% to 88 Wednesday and has still added 154% for the year.

"On the fiber-optic side of things, people are holding onto their shares," says assistant portfolio manager Wendy Snow with the hedge fund

Lamoreaux Partners

, a holder of JDS Uniphase. With a long backlog of orders for the optical components, Snow is keeping a tight grip on the stock.

At the BancBoston Robertson Stephens semiconductor conference in San Francisco, the market's weakness is good news for chip investors, according to money managers scouting for bargains. "I'm looking for opportunities to keep adding," said James Renck, chief investment officer of

Renck Capital Management

. "We've had some big runs so people are nervous."

At last year's conference, money managers sulked over the little near-term promise in the chip sector. This time around, they are almost prancing thanks to the returns on their investments in chip stocks since the sector bottomed last October. Renck, for example, started his technology fund Oct. 1 and has seen 140% return.

Ken McCain, a portfolio manager at

Wall Street Associates

, also was optimistic about chipmakers. "Last year was a down year when people weren't investing," McCain says. "Now people are worried that they might not have enough inventory so they are building up and you also have a seasonal pickup of PCs."

Another manager, Jim Chen, analyst at

Roger Engemann & Associates

is looking for the market to head lower even further so he can pick up chip stocks at a better bargain. All the signs, he says, are good for the sector to rise. "I'm sure PC-related stocks will be strong. Pickup in orders is occurring several weeks ahead of expectations that leads to believe there won't be much of a softness this summer."