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First-quarter high-fliers grounded

The beginning of the year started with tech stocks charging past "old economy" companies, but since the Nasdaq peaked March 10, most tech shares have been in a steady downward trajectory.

What a difference a quarter makes.

The first three months of the year started where 1999 left off: with tech stocks charging past shares of staid "old economy" companies. But since the Nasdaq peaked March 10, most tech stocks have been in a steady downward trajectory.

Fourteen of the 18 sectors tracked by CNET posted double-digit gains in the first quarter, led by semiconductor stocks. E-tailers suffered large losses in the quarter, one of four sectors to end the period on a low note.

But so far this quarter, the trend has been inverted: 14 of the 18 sectors are down, led by a 15 percent decline in the PC software sector.

"The first quarter was a good period for the markets, and it was basically a quarter where tech stocks led the way," said Ed Keon, director of quantitative research for Prudential Securities. "We've seen extraordinary volatility in the second quarter, but at the end of the day when the year closes out, investors will have been happy to have had their portfolios overweighted in technology."

Keon said the Standard & Poor's 500 index is expected to gain 10 percent to 15 percent this year, and he believes technology stocks will perform slightly better. In most years, returns like that would be considered healthy, but to some they will seem paltry considering the Nasdaq's 86 percent run-up last year.

Whether tech stocks will recover is an open question, but what is clear is that for now, the bloom is off the rose.

In the first quarter, semiconductor stocks surged nearly 70 percent, and shares of semiconductor equipment makers jumped nearly 62 percent.

Analysts noted that the semiconductor market is riding a cyclical wave that began last year and is expected to crest in 2002. Chipmakers are finding that demand for their products extends beyond PCs to telecommunications and networking equipment.

Driving the performance in semiconductors were companies such as GlobeSpan, which makes chipsets used in high-speed digital subscriber line (DSL) modems. GlobeSpan shares rose nearly 370 percent, placing it second among semiconductor companies.

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Although the company was on a roll after its IPO last June, and although it announced a 3-for-1 stock split in February, its value has dropped by about 50 percent since mid-March and 22 percent from the end of the quarter.

Netergy Networks, formerly called 8x8, posted the largest gain in the sector, with a 478 percent rise. The company's performance was aided by its shift to Internet telephony from serving legacy systems with its chips, said Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray.

But Netergy, which has posted 10 consecutive quarters of losses, has since seen its stock decline about 30 percent from mid-March and about 15 percent from the end of the quarter.

"The Internet is not the only place where people are trying to determine what to pay for these stocks," said Dan Niles, an analyst with Robertson Stephens. He added that the market's slide since mid-March has brought valuations for some companies to more reasonable levels.

One of the more interesting phenomena is how several big-name semiconductor and PC companies have managed to gain ground while the markets have fallen since March. Intel is up 9 percent, Advanced Micro Devices has climbed 44 percent, and Micron Technology is up 14 percent since the Nasdaq peaked in March, Niles noted.

"At a certain point, valuations matter and investors will look for big companies that have earnings and will be around for a long time," Niles said.

AMD, meanwhile, gained about 104 percent during the previous quarter, compared with a gain of around 60 percent for Intel.

When it posts earnings tomorrow, AMD is expected to report a 10 percent rise in revenues for the first quarter compared with the fourth quarter. Typically, chip companies' sales fall from the fourth quarter to the first.

Internet stocks, meanwhile, plunged during the quarter, with e-tailers falling 32 percent. Internet content companies lost more than 19 percent of their value, and Internet services companies gave up nearly 6 percent of their value.

Cybershop was hit with the largest decline, falling 71 percent, followed by eToys with a 66 percent drop.

"The first quarter is seasonally slow for retailing in general, and a lot of stocks were bid up in anticipation of fourth-quarter results," said Sara Farley, an e-commerce analyst at PaineWebber.

She added that investors also seem to be losing patience with companies that do not have a timetable for profitability and continue to post widening losses.

Despite the large sell-off of e-tailing stocks in the quarter, a handful managed to post double-digit gains. Priceline generated the largest gain, with a 68 percent jump, while eBay managed to climb nearly 41 percent.

"Priceline has demonstrated financial discipline by decreasing its operating losses every quarter and recently moved up its profitability expectations to the first half of 2001 from the second half," Farley said.