High-Tech Stocks Seem Poised for Seasonal Swoon

Compaq Computer may have rung the exit bell for high-tech stocks on Thursday--right on time for the annual industry forum that has often marked the stocks’ yearly peaks.

Compaq plummeted $9.375 a share to $52.50, a stunning 15% drop, after the personal computer company reported lower-than-expected first-quarter earnings and forecast that second-quarter results would be below year-ago levels. Compaq blamed a rising dollar for hurting overseas profits and tough competition for hampering the domestic outlook.

Tech stocks in general were broadly lower on fears that Compaq’s woes aren’t isolated: Apple Computer fell $2.25 to $58.50, disk-drive maker Conner Peripherals dropped $1.25 to $26.375 and semiconductor giant Intel Corp. lost $2 to $53.

The timing of Compaq’s announcement is eerily disturbing to professional investors because it coincides with next week’s annual Hambrecht & Quist tech-stock conference in San Francisco. Scores of tech companies send their top executives to this event each year, where they present the bullish case for their stocks to hundreds of money managers from around the world.

The conference provides a great forum for hunting new tech investment opportunities. Unfortunately, it also has the dubious reputation of being tech stocks’ last big hurrah each year in a perceived annual boom-and-bust cycle.

Meanwhile, the September tech conference of another San Francisco brokerage, Montgomery Securities, is generally viewed as the time to be buying tech stocks, because they frequently reach their low points in the fall.

Hence the tech-timers’ motto: Buy ‘em at Monty, sell ‘em at H&Q.;

The accompanying chart tells the tale:

Since 1980, an index of 175 tech stocks tracked by H&Q; has posted gains between Sept. 30 and April 30 in seven of the 11 periods.

* On the flip side, between April 30 and Sept. 30 the index has fallen six out of 10 times (this year’s not yet in, of course). And even when the index has risen, the gains have been minuscule.

That tendency for peaking in the spring and bottoming in the fall has been so persistent, it begs the question why more money managers don’t play the trend for all it’s worth. “I don’t know the answer to that,” admits Dan Leonard, manager of the Financial Programs Technology stock mutual fund in Denver. “But I’m beginning to pay more attention to it.”

Why should tech stocks follow such a pattern? Partly, they’re just following what has been a frequent pattern for the stock market overall. The market has long shown a preference for rising early in each year and for reaching bear-market bottoms in October. (Think of some recent Octobers--1979, 1987, 1989 and 1990).

That boom-and-bust cycle “is just more emphasized in high-tech stocks because they’re more volatile anyway,” says Michael Murphy, editor of California Technology Stock Letter.

But Murphy says the tech cycle also is affected by the tendency of tech-stock analysts to be overly optimistic each fall when projecting next year’s earnings and overly pessimistic each spring and summer when companies fail to meet those high expectations. Plus, the summer quarter is often a slow one for computer shipments, creating a natural depressant on earnings in the period.

So is Compaq just a fortuitous early-warning signal for people smart enough to listen? Tech stocks have had a great run since last September, so there’s a lot of profit to be had by selling now.

Barney Hallingby, H&Q;’s research chief, argues against being tempted by the seasonal pattern idea. “I’ve heard it talked about before,” he says. “But every time I’ve tried to invest based on some seasonal idea, it hasn’t worked. I just try to pick (stocks) one at a time.”

While Compaq is suddenly struggling, Sun Microsystems’ stock soared $4.75 to $38.25 on Thursday, Hallingby notes. Sun’s quarterly profit was well above expectations because its computer workstations--once used mainly by scientists and technicians--now are grabbing commercial market share that had belonged to Compaq and other PC firms, Hallingby says. Rather than a time to sell all tech stocks, he simply sees this as an opportunity to identify new leaders.

Still, money manager Leonard concedes that, if Compaq is hurting, investors have to wonder about the other PC makers. He sold his AST Research and Dell Computer holdings last week, he says, because even if their business is strong, the “psychological pressure” of Compaq’s fall is likely to take its toll.

And the next question more investors will ask, Leonard warns, is: “What about the people who make the parts for computers?”

TECH STOCKS: TIME TO SELL? The Hambrecht & Quist index of high-tech stocks has shown a remarkable seasonal pattern over the past 10 years, generally rising from the end of September to the end of April, and falling in spring and summer. Gains are highlighted in bold below.

Sept. 30 Index April 30 Index to April 30 change to Sept. 30 change 1980-81 +10.7% 1981 -22.4% 1981-82 +0.1% 1982 +4.1% 1982-83 +68.3% 1983 +5.4% 1983-84 -18.2% 1984 -3.0% 1984-85 -12.6% 1985 -0.3% 1985-86 +32.0% 1986 -11.8% 1986-87 +49.5% 1987 +8.9% 1987-88 -25.6% 1988 -7.3% 1988-89 +7.0% 1989 +2.9% 1989-90 -3.6% 1990 -19.0% 1990-91 +50.8%* 1991 ??

*through Thursday’s close