Ebb and Flow of High-Tech Giants Jolt O.C. Stocks : Computers: Companies dwarfed by such industry leaders as IBM, Digital Equipment and Apple are caught in up-and-down pattern of their bigger brethren-- whatever their prospects might be if considered independently.

When an industry giant like International Business Machines Corp. sneezes, as it did last month by forecasting lower earnings, it often takes the stocks of hundreds of computer companies down with it.

The opposite is also true, as dozens of publicly held technology companies in Orange County know only too well.

For a small company, the whims of Wall Street can prove frustrating. The case of State of the Art Inc., an accounting software company in Irvine, is an example. The company has been consistently profitable through the years, and its prospects for the future appear bright.

Nevertheless, the company, which raised $30 million in a public offering May 23, has seen its stock dragged down recently by general fears about a downturn in the computer industry.

“It’s disconcerting at times to see stock prices fluctuate, and our stock has been trading like the rest of the technology sector,” Chief Executive Officer David Samuels said. “But I feel we’re in control of our fate. We know we’ll see a change when we announce our own earnings.”

County technology companies--most of which are dwarfed by such industry giants as IBM, Digital Equipment and Apple Computer--have generally seen their stocks follow the same up-and-down pattern as their bigger brethren.

Despite some gains last week, the stocks of 16 computer-related companies in Orange County rose on average more than 50% during the spring--only to lose most of those gains during the last two months.

The spring rally, which peaked in April, began as a seasonal rebound in stock prices that was given added impetus by American Telephone & Telegraph Corp.’s buyout offer for rival NCR Corp. The five-month takeover fight drew attention to undervalued technology stocks and boosted values throughout the industry, said Liz Buyer, a computer analyst at Cowen & Co., a New York investment bank.

The first-quarter rally helped propel such stocks as AST Research Inc. and Advanced Logic Research Inc., both of Irvine, and Dell Computer Corp. in Austin, Tex., all of which make IBM-compatible personal computers.

Corporate computer buyers, pinching pennies during the recession, viewed products from these companies as better buys than higher-priced offerings from such industry leaders as IBM, Apple and Compaq Computer, Buyer said.

One index published by the trade journal PC Week that measures 31 computer-related stocks, including AST, peaked April 17, when the group was 55% higher than on Jan. 9.

The spring rally prompted many technology companies to go forward with initial or secondary public stock offerings. In February, three dozen computer firms were lined up like jets waiting for takeoff at a busy airport, said Richard Shaffer, a principal at Technologic Partners, a New York consulting firm.

Sixteen computer-related companies went public during the first half of 1991, compared to 17 for the first half of 1990. As evidence of the market’s buoyancy, however, those 16 firms raised a total of $442.8 million during the first six months of this year, according to New York-based IDD Information Services; the figure was $391.2 million a year earlier.

But since mid-April, the PC industry has starting taking its lumps. IBM, Apple and Compaq have reported lower quarterly earnings this year and issued bleak forecasts for the rest of the year.

“There was a hope that the end of the (Gulf) war would bring corporate buyers back,” Buyer said. “Dealers built up inventories, but in April they realized business was slow, and suddenly the bigger computer companies began to expect lower profits.”

Many institutional investors bailed out of the technology sector in a retreat that left many companies devastated, said Shaffer of Technologic Partners.

In addition, Western Europe has followed the United States into a recession. Some computer companies had been counting on growth in that market to help offset sluggish sales in the domestic market. As large manufacturers slash prices on products in a bid to help them recover, smaller competitors are forced to respond in kind.

“Unless a company is a leader in its market niche, most are caught in a profit-margin crunch because of pricing pressures at the big companies,” said Mark Matheson, research director at Cruttenden & Co., an Irvine investment bank.

Even AST, whose stock soared 259% in 1990, has watched its stock fall in value in the past two months, despite upbeat forecasts from analysts.

The rationale is that, despite its highly successful strategy, AST could suffer because of the overall bleak outlook for the computer industry and the expected continuation of price wars among the large PC makers.

With Wall Street’s retreat from technology stocks, the initial public offering market for high-tech firms has nearly dried up, Shaffer said.

ALR’s stock also prospered from the general rally in technology stocks in the spring. Its stock price reached a high of $20.50 a share April 12; it had closed at $9.25 on Jan. 4.

Despite a 25% earnings gain reported in April, ALR’s stock began to fall after dismal financial reports from Compaq and Apple. As a result of the souring climate, the company was forced to scale back a secondary public offering during May, from 1.5 million shares at $16 a share to a more modest 1 million shares at $12.50 a share.

“We would have loved to have done the offering a month earlier, but we think we made the right decision, given the external circumstances in the industry,” said James Richardson, chief financial officer for ALR.

Now ALR’s stock is meandering in the $13-a-share range. The company expects to report in the week of July 29 that it will have lower revenues for the quarter ending June 30 than in the previous quarter ending March 31.

At the end of June, the PC Week index remained 17% above its starting point in January, yet below its mid-April high. Likewise, county technology stocks are mostly higher than they they were in January but below their peaks for the year.

One exception is Western Digital Corp., which started the year in the midst of a difficult reorganization and market transition. In the past six months, the firm’s recovery has been slow and its outlook mixed.

It got a boost from a contract to supply components for IBM’s new laptop computer, but sales of older products have continued to languish. Western Digital reported an unexpectedly big loss for its quarter ended March 31; more losses are anticipated for the quarter that ended June 30.

As a result, the company was one of the poor performers among county stocks during 1991’s first half. At the end of June, the company’s price was nearly 18% below its $4.875 a share level on Jan. 4.

For the rest of the year, the companies that are doing well now should continue to do so, while those undergoing transitions to new product lines will probably languish during the traditionally slow summer months, Buyer said.

“I think the technology stocks will continue to drift until we get strong and conclusive news about an economic recovery,” said Shaffer of Technologic Partners.

Winners and Losers Alpha Microsystems showed the biggest percentage gain for the first 28 weeks of the year. Archive Corp., struggling to digest its 1990 acquisition of Cipher Data, suffered the largest proportional loss. Alpha Micro: 127.3% Gateway: 125.0% Amplicon: 108.1% FileNet: 96.7% Rainbow Tech.: 80.0% Emulex: 60.5% ALR: 46.2% AST Research: 41.2% Gradco Systems: 13.6% CMS Enhancements: 5.9% Printronix: 1.5% PDA Engineering: 1.4% Diceon Electronics: -14.8% Western Digital: -17.9% MAI Systems: -33.3% Archive: -38.2%