High tech woes continue

The story from the technology sector just keeps getting bleaker. It seems that almost everywhere you look there is more news of profit warnings and layoffs.

The big bombshell the first week in July actually came from overseas. When U.K. giant Marconi PLC announced is was drastically reducing earnings estimates for this year, the ripple effects were felt right across the Atlantic. Marconi trades shares on the Nasdaq under the symbol MONI. The stock’s value in New York fell almost 60 per cent on the week, from US$7.59 on Monday to US$3.05 at the close on Friday. 

The announcement also hit other companies in similar businesses hard. One of the casualties was Nortel Networks (NT), which hardly needs any more bad news. Nortel shares fell $1.87 on the week to close at $12.13, the lowest the stock has traded at since 1998.

Ripple effect
The market was still digesting the Marconi shock when several other high-profile tech companies weighed in with warning of their own, including Advanced Micro Devices, EMC Corp. and BMC Software.

All this was enough to send the Nasdaq Composite to a 76 point loss on Friday and a total drop on the wk of 7.27 per cent.

On the TSE, the Industrial Products sub-index, which includes Canadian major tech companies like Nortel, Celestica, and Research in Motion, dropped 6.82 per cent. That was enough to drag the overall TSE 300 Total Return Index to a fractional loss on the week.

Warning stands
The warning stands: many technology stocks still look expensive, despite the stunning losses they’ve incurred. Last month, an RBC Dominion Securities report showed New Economy stocks on the TSE were trading at almost 49 times earnings while Old Economy stocks were at 14 times earnings. My advice was to avoid New Economy issues for now, except for some rare exceptions. The events of the past week have only served to reinforce that view.

At some point, high-tech issues will snap back with a vengeance. But that’s not likely to happen anytime soon. This is not a time to be aggressive with your investing. There are plenty of old-line stocks that offer much better potential over the next 6-12 months.

Adapted  from the Internet Wealth Builder of July 9, 2001.