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Tech stocks may look hot, but understand what's driving the gains

Posted: Thursday, November 28, 2002

NEW YORK (AP) -- Call it stock surfing. Catch the wave at just the right time or wipe out.

So is it too late to jump onto the technology stock wave?

Sure, it looks tempting to buy tech shares right now. After two years of big losses, they've come back strong, many registering super-sized gains.

But this rally isn't driven as much by better tech-company earnings or a rebounding economy as it is by big institutional investors looking to boost year-end returns.

That doesn't give this upswing much of a backbone, which means it could fizzle fast and leave you stuck with stocks worth far less than they cost.

'''Tis the season for professional money managers to try to pad their performance by the end of the year. That's what's behind this,'' said Brian G. Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray in Minneapolis.

The broad market turned higher on Oct. 10, after a punishing few months that sent stock indexes plunging to their lowest levels in more than five years.

Tech shares have really benefited from the change in sentiment. Investors, who had been clinging to safer and more stable stocks for much of the last two years, began to look again at high-tech stocks.

In fact, four of the top five best performing Dow Jones sector indexes in the last month are technology-based, while the worst performers include those made up of retailers, health care providers and tobacco.

And while you think you might want to get in on this rally, you better understand what's driving it.

This isn't fueled mostly by investors attracted to the low prices on tech stocks after two years of steep losses. There's some of that, but the gains are so broad it doesn't look like investors are selectively shopping for undervalued stocks.

Additionally, most of the business fundamentals behind tech companies haven't changed too much. While earnings are looking up a bit, the expected gains aren't so huge that they would set off this swift run-up.

Rather, this rally is coming largely from big buys put in by professional money managers who are looking for ways to shore up their year-end results. They think they have nothing to lose by hanging their bets on Wall Street's most volatile shares, which tend to outperform the overall market when it is trending up and do much worse when it is down.

This is known as buying stocks for their ''beta'' benefit. Beta measures the degree to which a stock price fluctuates vs. the total market, usually over a 60-month period.

The Standard & Poor's 500 stock index, considered the best gauge of the broad market, has a beta of one. So an issue that has a beta of 1.5 will move up 15 percent when the market rises 10 percent, and will fall 15 percent when the market is down 10 percent.

As it happens, most of the high-beta stocks today are in the technology sector.

''When the market is rallying and they (professional investors) want to catch up, they look for high-beta stocks because there is a good likelihood that they will move higher than the broader market,'' said Tobias Levkovich, senior institutional equity strategist at Salomon Smith Barney.

So far, their tactics have worked. Seven of the top 10 highest-beta stocks in the S&P 500 have more than doubled since the broad market turned higher in mid-October.

The S&P over the same period of time is up about 20 percent.

According to investment research company Multex.com, Avaya, which has a beta of 3.77 -- highest in the S&P -- has jumped from $1.48 on Oct. 9 to more than $3 today. It's still down significantly from its 52-week high of more than $13, which it hit last December.

Other big gainers in the top S&P beta stocks include Broadcom, Sprint PCS, Rational Software, PMC Sierra, QLogic and Power-One.

But the real question is whether these gains will last. The concern is that money managers, who are rushing into tech stocks now, will take their money and run once they see the returns they were hoping for.

That could send these stocks plunging fast and leave individual investors, who start buying at the inflated prices, with holdings at far reduced prices.

It wouldn't be the first time it happened. And it probably won't be the last.

------

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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