Tech Hangs Tough; Software Shines

• January 28, 2002
• Dan Delaney

Despite
a fog of negative economic news so thick you could cut it with a knife,
the Nasdaq managed shrug it all off and finish with a modest gain for the week
(even with Friday’s slight loss). Yes, a GAIN for the week that came against a
backdrop which included the ongoing Enron
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bankruptcy, negative analyst outlooks galore, and a ho-hum performance (was he
really trying to be upbeat?) on Capitol Hill from the Maestro himself, Mr.
Greenspan (who some think should be re-named “The Matador” for his
role in killing the bull).

It really was a constructive
week for technology, though, as the Nasdaq held its head high enough to close
ever so slightly above its 200-day moving average after slipping below it early
in the week. That 200-day MA has been the arch nemesis of the Nasdaq since the
collapse began in March 2000, and it was a definite plus to see the Nasdaq hold
above that level. What is particularly notable is that the 200-day moving
average is flat right now (or even slightly upward sloping if you are an
optimist) and that has not occurred in a long, long time.

While there are scores of tech
disasters still littering the landscape, there are some positive developments in
the group that clearly show that some areas are showing marked improvement. As
in most new market recoveries, new leaders often emerge, and they are sometimes
completely different groups than the ones that may have led the previous bull
cycle. That is happening right now with some software and security software
firms as well as some select chip companies, but it’s still reassuring to see
some of the traditional tech giants performing well.

The Big Dogs

Among former “lead
dogs” looking strong since the Sept. 21 low are Cisco
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Dell
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above their respective 200-day moving averages, while Microsoft has slipped a
tad below its 200-day. These four Big Dogs are worth keeping an eye on because
each has such a dominant lock on its respective market niche. As go these four,
so goes the broader tech market.

So what seems to be working in
techland besides the Four Horsemen? Well, it’s certainly not any of the fiber
optic or telco plays. That area seems like it will be the last to recover since
all the telco and optical equipment buyers remain debt-laden and on life support
in the tech intensive care ward. As I said above, what does seem to be working
well right now are some of the software and security companies.

Software
Rising

Software firms don’t have the
same inventory problems (and costs) as the equipment makers, so many of the
software leaders have remained profitable through the downturn and have bounced
back extremely well. When corporate tech spending picks back up, software
companies like application software maker Siebel Systems
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likely be one of the biggest and most rapid beneficiaries.

Likewise, with so much post 9/11
focus now on security, firms like Symantec
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guided estimates higher, thanks to surging sales of its Norton anti-virus
software to consumers. (Again, drop by a Best Buy sometime if you want to see
the ongoing tech boom first hand!)

Also well positioned for the
next leg up in tech is Adobe Systems
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providers of online communication and graphics software (Acrobat and Photoshop).
Internet traffic and use continues to surge, and that trend will likely continue
as broadband finally makes its way into more and more households (still only 10%
penetration). Anyway, that will bode well for Adobe as well as, you guessed it,
Microsoft.

What also makes these software
companies compelling right now is that they have real earnings, little or no
long-term debt, low price-to-sales ratios, and PEs that are for the most part
very attractive compared to the rest of tech. (And no “off-balance
sheet” financing!) The chart below shows how the five software companies I
mentioned match up to the average Nasdaq 100 stock and to the average S&P
500 stock. Note that the average Nasdaq 100 stock has a pricey average trailing
12-month PE of 71 while the average S&P 500 stock has a PE of 23.

It really was nice to see Mr.
Greenspan at least attempt to sound bullish on the economy this week. As much as
I fault him for exacerbating the tech meltdown, I do give him a lot of credit
for the gutsy 11 rate cuts AND the final one I think we will get next week. Then
it’s just a matter of time until all that liquidity kicks is and has our economy
hitting on all cylinders again.

Dan