To grasp just how unsettled the stock market is these days, consider defense electronics maker L-3 Communications Holdings Inc. (LLL ). Even though its sales and profits have grown all year, bear-market sentiment pinched its stock. In the first eight months of 2001, L-3 shares sagged nearly 20%, reaching a 52-week low of $60.70 on Sept. 10. Then came the terrorist attacks, and L-3--like many defense companies--surged. It's now trading near $90, thanks to a horrifying turn of events no market sage ever could have predicted. September 11 "assured the defense budget is going to be very strong over the next four or five or six years," says L-3 Chief Executive Frank C. Lanza. "Now the financial community values us."
Such gyrations have buffeted scores of top players in technology. Since September 11, travel companies such as Travelocity.com Inc. (TVLY ) and Sabre Holdings Corp. (TSG )--already trading lower for the year--have been hammered by a sharp drop-off in business trips. Investors are shifting instead to bellwethers such as mobile-phone giant Nokia (NOK ), software powerhouse Oracle (ORCL ), and wireless service star Vodafone (VOD ) --all of which have gained 30% or more since the attacks. Even so, the picture for the overall tech sector remains pretty darn ugly. Amid mounting evidence of a bona fide recession and doubts over recovery in 2002, tech simply isn't where nervous investors want to be.
A FIRST. That's the inescapable conclusion from the midyear checkup on BusinessWeek's Information Technology 100. Our annual survey of the top 100 global IT companies, published in June, ranks contenders by revenues, sales growth, profitability, and stock appreciation. Every fall, we calculate the companies' stock performance during the previous six months. This year, for the first time since we introduced the list in 1999, every tech sector shows an average decline in share prices. Four-fifths of the Info Tech 100 companies have lost value--17 of them by more than half. In total, the group sagged 23.5% between May 9 and Nov. 9, despite a sharp rally over the last month. "No question, this is the most extreme cycle of the last 30 years," says Larry Unrein, the head of private equity investment for J.P. Morgan Fleming Asset Management.
That's not to say there haven't been winners. Although major stock indexes fell over the past half-year, the top 10 performers on our list posted gains of more than 10%. Even many decliners did better than the broader market: One-third of the companies outperformed the 10.8% drop in the Standard & Poor's 500-stock index.
The best category: IT services and distributors, which grabbed 5 of the top 10 slots. Although the group as a whole fell 5.4%, it fared better than any other sector. The No. 1 performer was Cerner Corp. (CERN ) of Kansas City, Mo., which provides accounting and billing software and services for the fast-growing health-care industry. With an expected $575 million in sales next year, up 16%, Cerner is a rare tech growth story. It's also profiting from a makeover of its product line over the last five years: Cerner spent $350 million converting from mainframe programs to Windows-based software, giving it a jump on rivals.
That edge applies to other top performers as well. Although it's hard to believe companies associated with the PC could be stock champs, No. 2 and No. 3 on the Info Tech 100 update serve that battered sector. Their secret? Sticking to their knitting. No. 2, CDW Computer Centers Inc. (CDWC ) of Vernon Hills, Ill., has prospered by selling PCs and peripherals to the growing--but underserved--small and midsize business market. And computer gear distributor Tech Data Corp. (TECD ) of Clearwater, Fla., No. 3 on our list, keeps a tight lid on costs and boasts industry-leading gross margins.
These stocks are benefiting from relatively bullish growth forecasts. Spending for tech services is expected to increase 10% in 2002, vs. a 3% rise in other tech spending, says researcher International Data Corp. "Outsourcing companies actually flourish in a down economic environment," says analyst David Grossman of Thomas Weisel Partners LLC. Such thinking has boosted other services companies such as Affiliated Computer Services (ACS ) and Fiserv to the Info Tech 100's top 10.
The surprising runner-up category was telecommunications services, which fell 18% on average. Its relatively strong showing is unexpected because telecom is in turmoil, with stagnant sales, overcapacity, and crushing debt levels. What do investors like? Hold onto your hats, free-marketers: The top performer is Alltel (AT ), a Little Rock-based provider of phone service in rural areas where it's often the only game in town. And players such as Swisscom (SCM ) and Telefonos de Mexico (TFONY ) are quasi-monopolies that face little domestic competition--helping them stay profitable and churn out gobs of cash.
BLEAK. Who were the big losers? No group fared worse than communications equipment makers, with contract manufacturers and software companies only slightly better off. All three sectors saw earnings fall during the past six months and face dubious growth prospects next year--a recipe that sends investors running for the exits. The worst performer: ACT Manufacturing (ACTM ) , a contract manufacturer based in Hudson, Mass., which disappointed Wall Street on Oct. 31 with bleak third-quarter results. Its shares have fallen 92%. Says Goldman, Sachs & Co. analyst Michael Zimm, ACT's "long-term viability is increasingly at risk" due to dropping sales and mounting debts. Ciena Corp. (CIEN ) of Linthicum, Md., a pioneering maker of optical communications equipment, was No. 99. After holding up better than rivals all year, Ciena in August slashed 2002 projections and took a beating from Wall Street. On Nov. 12, it announced a restructuring and a 10% layoff.
Investors were particularly tough on former high-fliers. No. 98-ranked Comverse Technology Inc. (CMVT ) of Woodbury, N.Y., a top supplier of voice-mail systems, was a tech darling for years. But slowing telecom growth and concern that Comverse has nothing else up its sleeve turned investors off. Its stock fell 72%. The Street was equally harsh on San Francisco-based Micromuse Inc. The maker of software for monitoring network performance was golden a year ago, but slumping sales and earnings drove it to No. 97.
SHINING LIGHTS. Even in down industries, though, some companies shone. Investors are backing No. 4-ranked Nvidia Corp. (NVDA ), which continues to churn out huge profits from its successful graphics chips for PCs and game machines. Another standout is Fairchild Semiconductor International Inc. (FCS ) of South Portland, Me. It appreciated 18%, compared with a 20% average decline for the 25 chipmakers in the IT 100. Fairchild makes specialized power chips used in computers and telecom gear. Not that it has had a banner year: Sales for the first nine months fell 18% and it lost $25.5 million, vs. a $180 million profit the year before. But compared with a 33% revenue plunge for the semiconductor business as a whole, Fairchild looks pretty good.
There are even points of light in the sickly computer industry. Peripherals-maker Logitech International (LOGIY ), for instance, expects sales growth of 25% this year. "The strategy is to disconnect Logitech from the growth of the PC market," says CEO Guerrino De Luca. Smart move. Even as PC sales sag, analysts figure Logitech's earnings from Web cameras and wireless mice will climb 40% this year. Another gainer is Dell Computer Corp. (DELL ) , whose share of the shrinking PC business has climbed to 14.5%, from 11.5% a year ago, according to IDC. Wall Street figures Dell's earnings will grow 17% next year, even as rivals struggle to avoid red ink.
The lesson of the Info Tech 100 update is clear. Although companies on the list have suffered, nearly two-thirds of them performed better than the Nasdaq Composite Index over the last year. That suggests they belong in such a select group. What no investor anticipates, though, are strange twists of history that can change forever the fortunes of companies--and render even the most rigorous analysis a mere roll of the dice.
By Andy Reinhardt, with Darnell Little in Chicago, Steve Rosenbush in New York, and Andrew Park in Dallas