Are High-Tech Stocks Heading For A Big Fall? Investors Lured To High-Tech Companies During Bonanza Are Now Reluctant To Sell Off, Even Though Rough Times May Be Ahead

Back in January, Smith Barney stockbroker Stephen Kittenplan recommended that his customers pile into high-tech stocks. They’ve been richly rewarded, with some seeing returns of 40 percent to 50 percent on their investments.

Now, Kittenplan finds, they won’t sell. “I say to clients, ‘Do you think you have made enough money in this?’ ” Kittenplan says. “They say, ‘No, I want to hold on.’ “

Yet some experienced investors and analysts warn that this could be the start of a dangerous season for technology stocks. Financial history shows that investments that ascend so rapidly eventually reverse course, and these experts say investors should prepare for a hard landing.

There already are a few worrisome straws in the wind. Tech stocks as a group have not risen much since July, and last week some bellwether names, such as International Business Machines Corp., Apple Computer Inc., Micron Technology Inc. and Oracle Corp., lost altitude after disappointing earnings announcements.

And looking ahead, there are signs of a slowing in demand for computers in the United States and in Europe, according to industry and stockmarket analysts.

Of course, no one can predict precisely when technology stocks will turn. The last time the sector changed direction was in 1990, when computer and related companies were trading at price-earnings multiples as low as those of steel companies.

The industry’s fortunes changed because of two factors, according to Fred Hickey, editor of the High Tech Strategist, a newsletter based in New Hampshire: a rebound in personal-computer sales and “the most massive inflow of mutual-fund money in history.”

“As the money flowed in, prices rose off the bottom,” Hickey said, “and as the mutual-fund managers who had a heavy exposure to tech won, they received a disproportionate amount of the money flowing into mutual funds, and that in turn caused them to apply more money and drive prices higher.”

Hickey has dubbed the mutual-fund mania for tech stocks the “Vinik bubble,” in mock tribute to Jeff Vinik, the portfolio manager of Fidelity Investments’ Magellan Fund, who has made this year’s biggest bet on U.S. tech stocks.

“Mr. Vinik has about $22 billion in tech stocks alone, almost double the size of the entire Magellan Fund ($13 billion) when Peter Lynch retired in 1990,” Hickey said.

There are still valid reasons for investing in U.S. technology companies, Hickey said. High-tech is the premier growth industry in the United States, he said. “It is largely unregulated and attracts many of the most ingenious people we have.”

Merrill Lynch & Co.’s chief investment strategist, Charles I. Clough Jr., added, “What was different this time compared with the last run-up in tech-stock prices in 1983 is that we (now see) companies with proprietary technologies that really dominate certain areas of the business.”

Everyone has been hoping to spot the next Intel Corp. or Microsoft Corp., just as they looked for the next Xerox Corp. a generation ago. Meanwhile, some investors have begun to believe that technology is different from other sectors of the economy, and in large part impervious to boom-bust cycles that afflicted it in the past.

But cycles still rule, warn some analysts and professional investors. “We are in the seventh inning of a nine-inning game,” said a money manager at the Soros Organization, the trading firm run by famed speculator George Soros. “But historically, the last two innings have been exciting and often quite profitable.”

The reason for late rallies, according to the Soros manager, who did not want to be identified, has to do with the nature of high-tech investors.

“The typical tech guy is a fast-money, momentum player who does not look at the fundamentals of the companies, but instead at the growth rate of earnings and at share-price appreciation,” he said. “As long as they see increases in per-share earnings, they pile in.”

What about now, when earnings growth is slowing for some companies and beginning to decline?

“When (investors) see a slowing in growth rates, they still pile in, because they think it is temporary,” said the Soros money manager. “It is only when they see actual per-share-earnings declines that everyone tries to get out. And then they all sell at the same time, regardless of price, because they know that the other guys will be selling.”

A few analysts believe that this sort of panicked rush for the exit could hit the market suddenly.

“People seem to forget that tech stocks fell about 35 percent on average in one quarter as recently as 1990. This can happen again,” said Hickey of the High Tech Strategist. “Some of the biggest holders of tech stocks, like Fidelity Investments, have yet to take much money off the table. Wait till they do.”

There are indications that Fidelity Magellan’s Vinik has stopped buying. Magellan, the nation’s biggest stock mutual fund, which currently has $54.3 billion in assets, had 43.3 percent of its money in technology as of July, the most recent reporting period. That was down slightly from the month before.

When a huge player such as Fidelity stops buying, analysts note, the entire market could soften.

Morgan Stanley & Co.’s chief U.S. investment strategist, Byron Wien, says he would worry only if he expected a slew of bad earnings, or if the fundamentals of the technology businesses deteriorated. But he doesn’t expect any such jolt.

Wien instead foresees only a shallow decline. “We are due for a correction here, but I don’t see the beginning of a bear market,” he said.