Who is to blame for tech stocks dive?

Technology stocks, which lifted the broader markets to unfathomable gains in the past three years, took the worst beating in their history Monday as the Nasdaq composite plummeted 140 points to 1499.15, erasing all this year's gains.

Technology stocks, which lifted the broader markets to unfathomable gains in the past three years, took the worst beating in their history Monday as the Nasdaq composite plummeted 140 points to 1499.15, erasing all this year's gains.

The four most prominent tech stocks on the exchange were crushed. Dell Computer Corp. (Nasdaq:DELL) plunged 18 3/4 to 100. Cisco Systems Inc. (Nasdaq:CSCO) shed 12 13/16 to 81 7/8 while Microsoft (Nasdaq:MSFT) and Intel (Nasdaq:INTC) lost 9 5/16 and 5 13/16 a share, respectively.

Monday's disaster comes after the Nasdaq had peaked at an all-time high of 2014.25 on July 20.

So who's to blame?
On the surface, it would seem that economic unrest in Asia, Russia and Latin America are the chief culprits. Currencies are being devalued, demand for technology equipment is waning and profit margins are plummeting.

There's also been a lightning quick fundamental change within the personal computer industry. Sub-$1,000 machines have become the industry's fastest-growing segment, meaning profit margins for drive makers, chipmakers and PC vendors have all taken an enormous blow.

But the irony of this major correction is most of the top-tier technology stocks are still fairly valued. Intel Corp.'s stock might not be returning the kind of growth investors had come to expect, but it's still pocketing more than $1 billion a quarter with no end in sight.

The problem, some analysts said, is that investors were spoiled by these stocks' fabulous growth during periods of surreal growth. Most of the stocks that have dragged the broader markets back to reality are still thriving companies.

They might not be growing at 30 percent or 40 percent a year as they had through 1996 and 1997, but they're still making a tidy little profit.

Victims of own success
Blue-chip stocks such as Intel, Compaq and Hewlett-Packard have become victims of their own success. The fact that they make a lot of money isn't enough to move the stock to any appreciable degree if it's not considerably higher than the year before.

It sounds strange to penalize a dominant company simply because it can't top its own Herculean efforts.

"For me, it's been really frustrating because it's hard to convince people of the value in some of these stocks," said Dan Scovel, an analyst at Fahnestock & Co. "For a company like Intel, the Street perception is that it's treading water. That doesn't inspire a lot of growth in the stock price, but to tread water and make $1 billion every three months is pretty damn good."

Scovel said the second- and third-tier stocks, especially in the semiconductor industry, have taken an unjust beating. There are at least 18 different product categories within the chip industry and even in these rough times, they all can't be in the hole at the same time.

"You can't be blind to the market sentiment right now, but some of these stocks are just irresistible at their current prices," he said. "Eventually, people are going to step up and buy these because their fundamentals are just too strong."

It's important to separate performance from hyperbole whenever the market makes a drastic swing in one direction or another.

Cisco Systems Inc. (CSCO) is a great example of everything that is right about the technology industry today. It keeps selling routers and other networking equipment at a record pace, growing market share, profits and its stock price in equal proportion.

In the past 12 months, its stock price has grown more than 74 percent. For the year, its up 57 percent. It keeps beating Street estimates in every fiscal quarter. Cisco has customers in Asia and Russia, too.

"It's a simplification, but investors will always by industry leaders even in a downturn," said Don Collier, an analyst at ProLytix Corp. "But that also means they will consolidate their investments in the Dells, the Ciscos, the Microsofts and abandon the smaller stocks that might actually have better long-term prospects."

Internet stock carnage
For the past six months, analysts have told investors that no segment offers better long-term potential than those mysterious and highly unpredictable Internet stocks.

But when the going got tough, those stocks fell almost as quickly as they had risen. Of course, even after the selling barrage of the past five weeks, Yahoo! (Nasdaq:YHOO) is up 144 percent for the year and 274 percent in the past 12 months.

"I don't even pretend to understand the Internets," Scovel said. "Nobody really knows how to fairly value these stocks. But when the panic strikes, people become a bit more realistic."

And when that reality sinks in, investors from individuals trading online to money managers jostling billion-dollar mutual funds all start throwing their money at the industry leaders such as Intel, Microsoft, Dell and Cisco.

Those four stocks make up approximately 29 percent of the Nasdaq composite's total value of roughly $2 trillion. Aside from their heavy losses Friday, the Nasdaq would be in much worse shape had these three stocks not held their own.

The last bear market for technology stocks occurred in 1989-90 when the Nasdaq lost 33 percent of its value. At 25 percent and falling, it's clear that this latest sell-off is more than a temporary correction.

"There's a natural tendency to look at the leaders in a correction," Scovel said. "But this is also the time to jump on undervalued stocks that simply can't go much lower regardless of the overall market conditions. This is where some real profits can be realized, it just might take longer than most investors are used to."

After catching lightning in a bottle for the past three years, investors are learning that it's not as easy as it once seemed to make a bundle in the market.

When you're betting on technology, you have to except the boom and bust cycle that's claimed more than a few CEOs at major tech firms.

Source: Inter@ctive Investor