E-tail, PC hardware stocks take lead in '01

CNET Investor tracked technology stocks last year, with some surprising results. Find out how the sectors ranked.

Margaret Kane
Margaret Kane Former Staff writer, CNET News
Margaret is a former news editor for CNET News, based in the Boston bureau.
5 min read
It's a good bet that back in January 2001 no one guessed that Internet retailers and PC companies would have the top-performing tech stocks for the year.

But those are the categories that ranked highest in yearly performance in CNET Investor's technology indexes.

The Internet Etailers index rose 35.3 percent during the year, topping all other categories measured by CNET. The PC Hardware index was next, growing 19.8 percent. These categories were among just four of CNET's 18 indexes that saw an improvement during 2001, in what was generally a dismal year for tech stocks.

Overall, the CNET Tech index, which features leading stocks from various sectors, dropped 22.7 percent for the year. The storage and telecom equipment indexes performed the worst of all sectors, falling more than 71 percent and 69 percent respectively.

Online retail seeing green
Big gainers in the two top sectors may have helped pull up their respective indexes. eBay was one of the best-performing large-cap stocks of the year, increasing 121 percent. That alone should have helped the struggling sector.

Race of the techs
CNET Investor tracked various technology sectors in 2001. Here's a look at how each fared, from best to worst:
Tech sector One-year % change
Internet Etailers +35.34
PC Hardware +19.82
Distributors +16.80
PC Software +7.88
Computer Services -3.33
Semi Cap Equipment -9.61
CAD/CAM -10.18
Peripherals -15.80
Internet Content -16.48
CNET Tech Index -22.71
Semiconductors -25.99
Communications Services -26.93
Wireless -36.93
Server Software -38.88
Internet Services -50.81
Server Hardware -52.78
Networking -54.89
Telecom Equipment -69.68
Storage -71.37

Source: CNET Investor

And in computer hardware, workhorse PC maker Dell Computer gained 55 percent over the year, shoring up poorer-performing stocks.

In both the e-tailing and hardware categories, stock valuations had sunk so low that there was almost no place to go but up. But the retailing index may have also been helped by the fact that some of its worst performers have simply gone out of business.

"1999 and 2000 was our bear market in this sector. We were leading the pack in terms of a downturn and share prices getting walloped. People threw out every stock, like the baby with the bathwater," said Shawn Milne, analyst at SoundView Technology Group. "But the key drivers are there; people are spending more time and more money online."

Indeed, there are some signs that things are starting to look better in retail. Early reports from AOL, Yahoo and MSN showed big gains in online spending over the holidays, and retailing researcher Comscore recently reported that online spending was on track to meet, or slightly beat, predictions of $10 billion to $10.25 billion for the fourth quarter.

"The (e-retailers) who did survive ended up being reasonably good companies with growing profits. And e-commerce turned out to be a lot more real than anything else on the Internet," said Safa Rashtchy, analyst at U.S. Bancorp Piper Jaffray.

PC hardware surprise
The success of hardware stocks is also a bit of a shocker.

Aside from Dell, it's hard to find a stock that performed well in 2001. The main problem was a shrinking PC market; research firm Gartner Dataquest reported U.S. sales slipping 18.7 percent in the third quarter.

Among PC firms, Gateway started off the year by missing expectations, laying off 10 percent of its work force and replacing its CEO. Things didn't pick up much, with the company reporting a hefty loss in the third quarter.

Hewlett-Packard and Compaq Computer, meanwhile, jumped on a roller coaster with their merger announcement, sending their stocks up or down depending on the day's news. The turmoil in the PC sector is likely to help Dell, analysts said. A Merrill Lynch survey on information technology spending Wednesday showed that chief information officers typically viewed Dell as the most stable PC vendor.

Joining Dell in positive territory was Apple Computer, which continued to perform well, with shares gaining 47 percent on the year courtesy of hot products such as the iPod.

Some analysts expect Apple shares to continue to deliver. Gerard Klauer Mattison analyst David Bailey upgraded Apple to "outperform" from "neutral" Wednesday adding that the company "has made substantial progress in its product development, sales and distribution."

Inventory gluts and price wars hurt handheld makers Palm and Handspring, although interest in those types of devices, as well as cell phones, picked up after the terrorist attacks against the United States in September.

The losers
Telecom's fall should be a surprise to no one. Industry executives referred to the slowdown in the telecom sector as a "100-year flood." The slowdown started at the end of 2000, and analysts were predicting that it may be well into 2002 before things begin to look better. Telecom carriers, who had been on a tear building out and upgrading their networks, began to drastically slow the pace, and the ripples were felt by makers of everything from network gear to cellular handsets.

"We are not forecasting any sort of boom here, nor do we expect to see much growth in 2002," wrote CIBC World Markets analyst Steve Kamman in a recent research note. But he did point out that telecom carriers' spending levels are below their projected 2002 budgets, which could point to a bump in spending for the first quarter.

The storage sector's decline was a bit more unexpected. If anything, industry watchers expected storage companies to be one of the few sectors that would actually benefit from the Sept. 11 terrorist attacks, with the presumption that information-technology executives would want to spend even more to protect their data.

But rather than put their money into complex, expensive storage systems, companies and investors instead put their money into cheaper storage products. That hurt EMC especially, and the company--which was beating estimates at the beginning of the year--became the subject of takeover rumors and posted a billion-dollar loss by the end of the year.

Though just about all of the stocks included in the worst-performing indexes suffered, all of the indexes were hurt by big losers, such as EMC shares, which dropped $40.87, or 75 percent, during the year; Nokia, down $16.35, or 40 percent; and Nortel Networks, which plunged $22.79, or 75 percent.

The question everyone's asking is whether things will turn around in 2002. Merrill Lynch, for one, issued a report Wednesday projecting a 3 percent increase in corporate technology spending in 2002.