TCS Daily

How to Respond to a Declining NASDAQ

By James K. Glassman - April 17, 2000 12:00 AM

On the morning of April 3rd, I released a TechCentralStation Investor Alert. The message was simple: tech companies and investors faced a new element of risk, based on rising political interference in technology markets. That afternoon, Judge Jackson and the Justice Department brilliantly illustrated the downside potential, as they collaborated in a successful political assault on America's preeminent tech firm, Microsoft.

The Justice Department and Judge Jackson, in combination with trial lawyers and state AG's, represent just one facet of the threat, however. There's also the growing movement by state politicians to lobby for Internet taxes plus efforts by some legislators to thwart competition in the local telephone market and regulate new broadband providers. Then you throw in Fed Chairman Greenspan's ill-advised rate hikes and the movement by old economy middlemen like car dealers to seek government protection from Net competitors and it all adds up to one thing: Bad news for tech investors.

Since I issued my warning, Microsoft alone has lost more than $150 billion in value - a real loss of wealth for the millions of people who own MSFT either directly or through mutual funds like Fidelity Magellan. And what's bad for Microsoft has proven to be bad for tech firms in general. The NASDAQ has lost more than a thousand points since my warning, and I don't need to tell you what the tech slump has meant to your personal savings. Unless you've had your money in cash or you've been shorting dot-coms, you have almost certainly felt the burn from this financial workout. So what do you do about it now?

Recently I told you that volatility can be the investor's best friend, because it means that great companies become available at bargain prices. It's also possible that much greater losses are in store. If the recent downturn has your stomach churning, here are a few questions you should ask yourself:

Question #1: Has anything happened to the companies I own to affect the basic premises of my investments? If you bought a stock because you believed in the company's superior management, have you just learned that all of the senior managers are quitting? Did a company you own divest itself of the very business that inspired your original enthusiasm? Did one of your tech stocks have its patents invalidated? If the original premises still hold and you're a long-term investor, then you're probably wise to hold on to your shares.

Question #2: Are there bargains in this market? That's an extremely difficult question to answer if you're trying to guess whether NASDAQ will go up or down in the next few days. But again, if you plan to hold an investment for many years, then you can confidently buy great companies now trading far below their recent highs. Could they fall even further this week? Of course, but that's only a problem if you need to sell next week.

Question #3: How worried should I be about further political activity undermining the value of tech stocks? It's possible that the market has now fully accounted for the political risks that I described on April 3rd. It's also possible that greater losses are in store. I'm going to be an optimist and say that the efforts of TechCentralStation and others will persuade people that a free market in technology provides the greatest benefits to all.

In fact, as I've tried to answer questions 2 and 3, I've become intrigued with a few companies in particular. At a recent 110, EMC Corporation (EMC) is almost 24% below its 52-week high. EMC is the clear leader in data storage - hardware, software and services to maintain and retrieve information for large corporate customers. This is no money-losing Net stock, but a fast-growing company which made more than $1 billion in profits in 1999. To learn more, check out our company profile of EMC in the Glassman Tech Top 30.

I'm also interested in another GTT 30 company, America Online (AOL). AOL is down almost 43% from its high to a recent $55 per share. You can complain about the Time Warner merger, but this is still the dominant ISP without a significant competitor. If you're worried about Washington moving on from Microsoft to attack the other leading firms in tech markets, you might think twice, but AOL is a great company which has lately demonstrated fast earnings growth.

I hope you heeded my recent warnings about, Salon, and I'm not sure the worst is over for third- and fourth-tier consumer web stocks.

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