Wall Street was regaining its composure during mid-afternoon trading Monday after opening the week in a sour mood, thanks to an out-of-the-blue profit warning from Compaq Computer.
Tech stocks remained largely in the doldrums, while blue chips were advancing quickly following some good news from the financial sector. Securities house Bear Stearns (BSC) blew away estimates with record quarterly income of US$1.42 a share, leading other financial concerns higher.
This was good enough for the Dow Jones Industrial Average, which jumped 134.86 points to 10308.70. Similarly, the Wired Index was 8.53 higher at 683.06, while the Nasdaq Composite Index was up just 11.92 at 2604.97. The S&P 500 rose 8.08 to 1356.43.
Both the Nasdaq and S&P 500 hit record highs on Friday. Then Compaq (CPQ) weighed in after the closing bell with word that tougher competition and sagging sales would result in quarterly earnings of 15 cents a share, or about half of what analysts had been expecting. Ouch. With the entire weekend to mull over that unhappy news, traders returned to work Monday and proceeded to dump just about any stock within reach.
It didn't take too long, though, for people to realize that they'd overreacted a bit. Piper Jaffray analyst Ashok Kumar told clients that "the PC market is in a 'Goldilocks' state -- neither hot nor disaster, just lukewarm." And Bill Gorman of PNC Asset Management, who told Market Cap on Friday that computer sales have strengthened considerably over the past three months, noted that much of Compaq's difficulties stem from its efforts to follow Dell Computer down the build-to-order road. "Compaq is still trying to find its way," he said.
For Rao Chalasani, chief investment strategist at Everen Securities, the key element here is distribution. "Prices are coming down and you need a lot of volume," he said. Companies like Dell, with well-established distribution channels, should manage to offset the lower profit margins that result from fire-sale discounting.
Still, the Street made evident its displeasure with Compaq's sneak attack. The company's stock tumbled 22 percent to $24.13, and was downgraded by no fewer than nine leading brokerages. The disappointment spread to other PC makers and their brethren. Dell (DELL) slid $2.06 to $41.50, Hewlett-Packard (HWP) fell $3 to $66.63, and Microsoft (MSFT) was $1.56 lower at $92.69.
Also weighing on the tech camp was BancBoston Robertson Stephens slashing Intel's rating to "long-term attractive" from "strong buy." The firm's analysts aren't thrilled by Intel's chances as it dukes it out with rival chipmakers in the low-end consumer market. Intel (INTC), which is expected to post quarterly profit of 55 cents a share on Tuesday, lost $3.75 to $61.63.
International Business Machines (IBM) couldn't buck the downtrend even as it announced a tie-up with RealNetworks to develop new and improved ways to transmit music over the Net (trumping a similar such announcement from Microsoft expected on Tuesday). IBM eased $3.81 to $182.50, while RealNetworks (RNWK) was up 14 percent at $237.
Even though Market Cap knew of Compaq's announcement on Friday, it said "there's no reason to think that things will worsen in the near future" for PC makers. Well, Market Cap still thinks that way. Compaq's red flag reflects the company's bumpy transition to a new business model, not the overall health of the industry. Prudent investors may spot this as a prime buying opportunity.
