by Gordon Pape in the Internet Wealth Builder
Many stocks still expensive despite meltdown.
The story from the technology sector just keeps getting bleaker. It seems that almost everywhere you look there is more news of profit warnings and layoffs.
The big bombshell last week actually came from overseas. When U.K. giant Marconi PLC announced is was drastically reducing earnings estimates for this year, the ripple effects were felt right across the Atlantic. Marconi, whose shares trade on Nasdaq under the symbol MONI, saw the value of its stock in New York fall almost 60% on the week, from US$7.59 on Monday to US$3.05 at the close on Friday.
The announcement also hit other companies in similar businesses hard. One of the casualties was our own Nortel Networks (NT), which hardly needs any more bad news. Nortel shares fell $1.87 on the week to close at $12.13, the lowest the stock has traded at since 1998.
The market was still digesting the Marconi shock when several other high-profile tech companies weighed in with warning of their own, including Advanced Micro Devices, EMC Corp. and BMC Software.
All this was enough to send the Nasdaq Composite to a 76 point loss on Friday and a total drop on the week of 7.27%. On the tSE, the Industrial Products sub-index, which includes our major tech companies like Nortel, Celestica, and Research in Motion, dropped 6.82%. That was enough to drag the overall TSE 300 Total Return Index to a fractional loss on the week.
We've warned several times in our Internet Wealth Builder newsletter that many technology stocks still look expensive, despite the stunning losses they've incurred. A month ago, we cited an RBC Dominion Securities report that showed New Economy stocks on the TSE were trading at almost 49 times earnings while Old Economy stocks were at 14 times earnings. Our advice was to avoid New Economy issues for now, except for some rare exceptions. The events of last week have only served to reinforce that view.
At some point, high-tech issues will snap back with a vengeance. But we don't think that's likely to happen anytime soon. Plan accordingly.
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