There will be life after Y2K for technology stocks.
While enterprise software stocks have taken a beating this year and IBM Corp.'s stock plunged 19% the day after the computer maker delivered a gloomy earnings forecast for this quarter and next quarter, some money managers think a bounceback might be in the offing.
During the past year, corporations have diverted technology resources into Y2K fixes. "Y2K has taken up a lot of bandwidth," said Jeff van Harte, vice present at Transamerica Investment Services, San Francisco.
After Jan. 1, businesses will shift resources into strategic technology investments, he said. "I think there'll be sort of a first-quarter surge, especially among financial services institutions."
Added Jay Nakahara, managing director at INVESCO Inc., New York: "If nobody is signaling complete Armageddon, there will be a rally. And not just in software."
Others think it might take a bit longer. "I think the first half of 2000 could be tough," said Marion Schultheis, managing director, J.& W. Seligman & Co. Inc., New York.
Ms. Schultheis thinks there will be a shift from "back office" investment technology spending to "front office" investments involving such issues as sales productivity and purchasing over the next six to 12 months.
Still, Ms. Schultheis said, IT budgets are very large, and it's not clear where that money will go.
GartnerGroup, Stamford, Conn., projects that private and public sector spending on IT will continue to grow, but will be redeployed from Y2K fixes to spending on e-business. E-business, now accounting for 10% of IT spending on average, will grow to as much as 50% by 2005, said Kurt Potter, senior analyst.
Meanwhile, information systems spending will balloon, growing to 50% of the average corporate capital budget by 2010 from 30% at present, he added.
Market math
Managers not only must pick the winners, they also must decide the stock prices have been discounted sufficiently because of Y2K exposure. For IBM, the bad news already is reflected in the stock's price, said Ms. Schultheis, who started snapping up shares when the stock plunged 213/4 points to 903/4 in primary trading on Oct. 21. The stock closed at 9315/16 on Nov. 8.
Some managers are skeptical that IBM's earnings problems are entirely connected to a Y2K-related slump in sales of computer hardware.
Gail Seneca, chief investment officer of Seneca Capital Management, San Francisco, said IBM officials had told investors two weeks before its earnings revelation that they didn't see any Y2K effect. When company officials flip-flopped shortly thereafter, the stock plummeted because "the market was punishing IBM," she explained.
But it's the stocks of enterprise software companies -- those firms whose products serve businesses rather than consumers -- that have taken it on the chin.
Software stocks, such as PeopleSoft Inc. and SAP AG have suffered the most to date, and thus are likely to bounce back the best, said Mr. Nakahara, who runs the INVESCO GT Technology Fund.
"The bounce, if the bounce does come, will come in some of the really depressed names," he explained.
In fact, SAP shares have performed well despite weak earnings because the bad news already was in the price, Mr. Nakahara said.
Buying stocks
While INVESCO remains underweight in software stocks, others have plunged in.
Walt Price, managing director at RCM Global Investors, San Francisco, said his firm has been boosting its weighting in software stocks for the past three months, buying stocks such as BMC Software Inc., i2 Technologies Inc. and Siebel Systems Inc., all of which had been hit by Y2K concerns.
Bill Miller, senior portfolio manager at American Express Asset Management, Minneapolis, said he is taking a conservative posture on technology stocks, explaining there still is risk in hardware and enterprise stocks. However, the firm is buying some software stocks selectively, including BMC Software, Network Associates Inc., Baan Co. NV and SAP.
A new report by Salomon Smith Barney says software spending will be strong over the next 12 months. A poll of Fortune 500 executives by the firm found expected strong spending on Microsoft, Oracle, BMC and SAP products.
Ms. Seneca said she is holding off purchases of software stocks. "As growth managers, we buy future revenues and future growth," she said. "We want to see the visibility of that pickup. So we're not there yet."
While some managers are waiting for enterprise software stocks, most are steering clear of hardware stocks, which are expected to take their biggest hits in the next several months.
"Hardware stocks have done really well," explained Mr. Miller. But it's likely there has been a lot of accelerated buying because of Y2K issues, which may show up in weaker numbers going forward, he said.
Officials at Putnam Investments Inc., Boston, predicted a distortion in spending patterns this March, said Nikesh Arora, analyst on Putnam's technology and telecommunications team. "All the companies we spoke to said they didn't want to buy a mainframe at year-end and have it blow out," he added.
A September earthquake in Taipei, Taiwan, that affected the supply of chips didn't help matters.
Dresdner RCM's Mr. Price said his firm is underweighted in hardware stocks but likely will put off purchases until the first quarter. Given current valuation levels, "it's a good time to be taking our weighting up. The only thing I'm a little bit worried about is that I don't think it will be a snapback."
Rather, it might take until the second half of 2000 for hardware company earnings to recover, he said. "If we had a longer timeframe, we would buy the stocks now because we know they will be good. But if we are trying to perform on a quarterly basis, which we try to do, we can probably wait a few months."
