Although stock investors are waiting for more solid evidence that the economy is on an upswing, they're willing to place some big bets on Wall Street's riskiest sector: technology.
Tech stocks, which dominated the market in its late 1990s rise and subsequent fall, have reassumed their leadership -- largely because they dropped so far that they're now at very attractive prices, according to Wall Street analysts.
PHOTO: AFP
"These are the companies that were truly battered," said Chris Johnson, manager of quantitative analysis at Schaeffer's Investment Research in Cincinnati. "The last two years of the bear market really punished tech companies."
That has made tech stocks bargains, especially when compared with blue chips that investors had been favoring.
The tech-laden NASDAQ composite index has climbed nearly 30 percent so far this year, while the Dow Jones Industrial Average has gained a more modest 9 percent.
Since March 11, when the market began to rally -- after the war in Iraq started and companies started posting better-than-expected first-quarter earnings -- the Dow has advanced about 21 percent. But the NASDAQ has surged about 36 percent.
Many analysts credit tech stocks' recent success to low prices. The rationale is that when the business environment improves, tech companies earnings will grow. So investors don't want to miss an opportunity now to pick up bargain-priced chip and PC makers, Internet service providers and networkers.
"Just as tech stocks got significantly overvalued during the bubble, they became significantly undervalued relative to their earnings power," said Brian Bush, director of equity research at Stephens Inc in Little Rock, Arkansas.
The penchant investors have had lately for tech stocks is a reverse of their attitude of the past three years, when they turned to safer, blue chips.
The Dow is down 22 percent from its record high of 11,722.98, which it hit on Jan. 14, 2000. But the NASDAQ remains down nearly 66 percent from its all-time high of 5,048.62, reached on March 10, 2000.
Johnson said that investors of late "are looking for those diamonds in the rough again."
"Investors are returning to being more speculative in nature and will look at those companies that will add the biggest bump, the next catalyst in their portfolio," he said.
But how long can investors count on technology to keep producing robust returns?
Analysts say that depends on whether the second-half economic recovery materializes and, more immediately, on second-quarter earnings, which companies began reporting in earnest this past week.
Expectations are high, particularly where tech is concerned. Consider, for example, that when Yahoo on Wednesday reported earnings that merely met analysts' estimates, the market sold off on Thursday.
But selloffs have been short lived, as seen Friday when the market recouped more than half of the previous session's losses.
"People are very optimistic," said Michael Murphy, head trader at Wachovia Securities in Baltimore. "The market wants to trend higher even though we [already] have had a good run."
For the week, the NASDAQ advanced 70.47, or 4.2 percent, to 1,733.93.
The Dow had a weekly gain of 49.38, or 0.5 percent, closing at 9,119.59. The Standard & Poor's 500 index rose 12.44, or 1.3 percent, to 998.14.
The Russell 2000 index, the barometer of smaller company stocks, had a weekly gain of 17.42, or 3.8 percent, finishing Friday at 473.77.
The Wilshire 5000 Total Market Index, which tracks more than 5,700 US-based companies, ended the week at 9,610.93, up 87.87 from the previous week. A year ago, the index was at 8,711.60.
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