Analysts expect blue-chip rally following Monday's meltdown

Summary:After Monday's debacle, individual investors need to crawl back from the windowsill, take a deep breath and get back in the game because things are just starting to get interesting. The sun will come out tomorrow and there'll be a ton of bargains to be had.

After Monday's debacle, individual investors need to crawl back from the windowsill, take a deep breath and get back in the game because things are just starting to get interesting. The sun will come out tomorrow and there'll be a ton of bargains to be had.

Most analysts aren't convinced that Tuesday will bring a robust recovery from Monday's meltdown, but they're almost universal in their contention that blue-chip tech stocks are a great investment at these cheap prices.

Dell Computer Corp. (Nasdaq:DELL) fell 18 3/4 to 100 and it's about to offer a 2-for-1 split. Dell, Intel, Microsoft and Cisco Systems comprise a lofty 29 percent of the Nasdaq's total value. They finally took the beating that smaller stocks have absorbed in the past two months.

This isn't to say that losing 140 points, the worst-single day loss in Nasdaq history, is a good thing. But both the Dow and Nasdaq have a history of recovering much of their gains after corrections of this magnitude.

It's also important to maintain perspective. All the big gains made in the first half of the year were wiped out Monday, but coming into the year analysts figured the first half of 1998 would be flat or down versus 1997.

Essentially, the market was already ahead of where it should've been and the selling spree of the past few weeks was overdue.

If anything, Monday's selloff could be characterized as a cleansing of sorts. Everyone has been waiting for a big correction to bring this sky-high market back to reality. Now, the shrewd investor will move in and pounce on bargains while the emotional investor is licking his or her wounds.

"The Dells, Ciscos (Nasdaq:CSCO) and Microsofts (Nasdaq:MSFT) were the last to fall," said Michael Murphy, editor of the California Technology Stock Letter. "The irony is that they, along with Intel, are looking at very strong earnings in the next couple of quarters. Now's the time to buy these leaders."

Its not just open season on the blue-chips either.

LSI Logic Inc. (NYSE:LSI), Informix Corp. (Nasdaq:IFMX), C-Cube Microsystems Inc. (Nasdaq:CUBE) and 3Dfx Interactive Inc. (Nasdaq:TDFX) are all at bargain-basement prices. These lesser known and comparatively undervalued stocks have taken more than their fair share of abuse this year.

"These are all stocks with good fundamentals and excellent percentage-growth potential," said Dan Scovel, an analyst at Fahnestock & Co." It's frustrating when people start blindly selling these stocks when they're poised for breakout quarters."

It's also important to remember that most investors are thinking long-term. Despite the panic and pontificatation, nobody really thinks the market is headed for a lengthy downturn.

"There's definitely been some panic selling," said Megan Graham Hackett, an analyst at S&P Equity Group. "Individual investors are scared. But this correction will give everyone a base to work from, a base we haven't seen a long time."

Then there's the Internet stocks.

Nailing down an accurate value for these stocks is almost impossible.

On Monday, Lycos (Nasdaq:LCOS) and Excite (Nasdaq:XCIT) fell 27 percent and 29 percent, respectively. Excite closed at 21 3/4 after peaking at 55 1/2 July. Lycos was at 53 5/8 in early August. Clearly, these stocks weren't "worth" those valuations. But are they fairly priced at Monday's closing prices?

"It's just a matter of time before these stocks hit another hot streak," said Ray Francis, a trader at CIBC Oppenheimer. "Are they solid long-term investments? Probably not. But ask the investors who had Yahoo! at 40 or Amazon.com at 35 if it was worth it."

Finally, Monday's volume on the NYSE was more than 926 million. This wasn't a "thin" correction. With so many shares changing hands, it's clear that everyone from individuals trading online to major brokerage firms were cashing in their profits on Dell or Cisco and gearing up for another shopping spree.

"This wasn't nearly as bad as the crash in October 1987 when we lost about 25 percent in one trading day," said Ed Glickenhaus, president of Glickenhaus & Co. "That was a panic. In comparison, this was relatively mild. Looking back, I'd say the market did a fine job of righting itself after that crash."

Topics: Dell, Amazon, Cisco, Intel, Microsoft

About

Larry Barrett is a freelance journalist and blogger who has covered the information technology and business sectors for more than 15 years. Most recently, he served as the online news editor for 1105 Media's Office Technology Group and as the online managing editor for SourceMedia's Investment Advisory Group publications Financial Pl... Full Bio

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