John Dorfman: Suddenly, tech stocks a buyers' market
As each quarter nears its end, I like to look at stocks that are the victims of hit-and-run accidents. These stocks have been banged up by fast-moving investors and left for road kill.
Some stocks that have been maimed in the fourth quarter are Sapient Corp. (down 69 percent), Gateway Inc. (64 percent) and CDW Computer Centers Inc. (56 percent).
For the year to date, some of the biggest casualties are Sapient (down 82 percent), Compuware Corp. (81 percent), Lucent Technologies Inc. (76 percent), Circuit City (77 percent) and BMC Software Inc. (76 percent).
Sapient is a fallen angel, but my sense is that it hasn't finished falling. The stock led the casualty list for both the quarter and the year to date. It began the year at $70.46 and rested at $12.50 Friday.
Based in Cambridge, Mass., Sapient helps companies design software, run their computer systems and use the Internet for business. Sapient sells for about 30 times the past four quarters' earnings. That's roughly in line with the S&P 500 (which has a price-earnings ratio of 26) but about twice the ratio I usually want to see. In the past four years, Sapient's average P-E has been 89.
Analysts are highly favorable: The Bloomberg recommendation database counts 24 "buy" ratings and only four "hold" ratings. But I'm waiting for a lower price. Most likely, only when analytical opinion turns negative will the stock be sufficiently washed out to buy.
On the other hand, everyone hates Compuware, which has 13 "hold" ratings and not a single "buy."
Compuware, based in Farmington Hills, Mich., is definitely having problems. Net income for the quarter that ended Sept. 30 was only $12.9 million, or 3 cents a share, compared with $91 million, or 24 cents, in the same quarter a year ago.
Like BMC Software and Computer Associates, Compuware sells a lot of software for mainframes. That's an unpopular and arguably declining niche of the industry. And it appears that Compuware is struggling more than BMC or Computer Associates to maintain any momentum.
Despite all that, I think Compuware deserves more credit than investors are giving it. Sales in its last fiscal year, which ended in March, were $2.2 billion, up from $534 million five years earlier. Earnings were $351 million, up from $62 million in 1995. The stock is at 11 times earnings and about two times book value (corporate net worth per share).
Gateway Inc. makes personal computers and has sold for an average price-earnings ratio of 27 for the past five years. Today, you can pick up the stock for only about 10 times earnings. The stock has slid to $17.52 from $70.94 in July.
Investors are right to be worried about a slowdown in the personal-computer industry, but I think this verges on panic selling. San Diego-based Gateway has virtually no debt, which should help it weather the bad times that presumably are to come. If you buy this one, I suggest going in slowly; I think investor sentiment may remain sour on the personal-computer group for six to 18 months.
The same ailment afflicts CDW Computer Centers, a Vernon Hills, Ill., company that's a direct marketer of computer products. I think this is a decent stock, but I'm not drawn to it at the current price of $30.06, which is 18 times earnings and more than four times book value.
Suddenly, there are so many bargains among technology stocks that an investor can afford to be choosy and select only the juiciest ones.
John Dorfman, a Boston-based money manager with Dreman Value Management, writes for Bloomberg News. His e-mail address is jdorfman@bloomberg.net.
December 17, 2000
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