06/17/96 BE IT EVER SO PRICEY, HIGH TECH IS STILL HOT

BE IT EVER SO PRICEY, HIGH TECH IS STILL HOT
Savvy investors are being very selective, zeroing in on specific markets
So much for the correction in technology stocks. The high-flying industry started 1996 on shaky ground, as investors sold off vastly overheated sectors, such as Internet companies and semiconductor makers. Turns out they were only taking a breather during a run of euphoria that just doesn't want to quit.
Technology stocks have come roaring back from the lows of January, gaining 21% through June 3, as measured by the Morgan Stanley High Tech Index. And barring any sudden shifts in the U.S. economy or interest rates, investment pros see more gains ahead for the rest of the year. There's no mystery why. ``Technology has the best earnings-growth prospects of any industry over the next two years,'' says John W. Ballen, a manager of small- and mid-cap stock funds at Massachusetts Financial Services Co.
Still, tech stocks are trading at such exceedingly high prices that experts are being much more selective. Instead of buying almost any small, fast-growing tech company, savvy tech investors are zeroing in on specific markets. They're also recognizing that the technology age is a global phenomenon and are dabbling in new opportunities abroad.
TOUGH TO BUY. In the U.S., the investment themes that are heard most frequently echo those that became popular last year: Networking, software, and Internet stocks are the hottest things going.
One portfolio manager who thinks many tech stocks are still a bargain is Alberto W. Vilar, president of Amerindo Investment Advisors Inc. For the year ending Mar. 31, he scored the best performance of all institutional money managers tracked by Thompson Investment Software. In the networking arena, he owns Ascend Communications Inc., even though it's selling at 67--about 88 times its estimated 1996 earnings. Nevertheless, he thinks it will have better-than-expected profit growth and will remain a leader in an exploding industry. Other Vilar favorites include a number of high-priced networking companies: Cisco, Stratacom, Fore Systems, and Cascade.
In software, Metatools, which sells computer games online, is a buy, says Alan Lowenstein, a technology analyst at the John Hancock Global Technology Fund. He looks for the company's revenues to grow to $41 million in 1997, up from $27 million this year. He also expects profits to rise 50%. Another pick is Premier Technology, a startup involved in electronic commerce, whose profits may more than double next year, he believes.
Internet stocks are so pricey they're tough to buy. It's not uncommon to find a company with $10 million in sales and a market cap of $1 billion whose stock is trading so high that the price-earnings ratio can be up in the hundreds. Many experts are wary of pure Internet plays such as Netscape Communications Corp.--too expensive. Instead, they prefer indirect routes to the Net.
Roland Gillis, lead manager of Putnam's Voyager Fund, likes Shiva Corp. in Burlington, Mass., which supplies equipment that lets companies access the Net. Shiva trades at 70 times 1997 earnings, and its profits are expected to increase by 57% next year. According to Gillis: ``What you have to do is decide which companies are going to participate in the long-term buildup of the technology infrastructure.''
Semiconductor p-e ratios tend to be much lower than other technology sectors. Intel Corp. is selling at a p-e of 17, because investors are concerned about high inventories and steadily declining prices. Amerindo's Vilar won't touch semiconductor stocks because ``they're too volatile.'' Other investors, however, are high on makers of proprietary chips. Gillis likes Analog Devices Inc. in Norwood, Mass., which produces a variety of specialized chips. The company is selling at 20 times 1997 earnings, but its profits are expected to grow about 25% a year for the next two years, Gillis says.
Hancock's Lowenstein likes LSI Logic Corp. and Atmel Corp. because he thinks they were unjustly battered in the sell-off in semiconductor stocks during the past six months. ``If we're not at the bottom of the [semiconductor] cycle, we're close to it,'' he says. The industry may begin boosting production and increasing its prices later this year, when Microsoft Corp. introduces its new operating system, called Windows NT, he says.
One sector many pros are avoiding is personal computers. These companies are saddled with low-margin commodity products. Shares in Compaq Computer Co., the nation's leading PC maker, have not budged this year, even though first-quarter revenues were up 35%. The reason? Profits were flat, and have been for the past nine quarters.
Europe seems to be catching high-tech fever at last. ``It's a turning point for Europe,'' says Christian Deblaye, managing director at Compagnie Financiere Edmond de Rothschild in Paris. ``The prices for stocks listed on the NASDAQ are crazy. Here, they are very inexpensive,'' he says.
BOGGED DOWN. Small companies have popped up all over Europe, and the popularity of some of these small-cap issues has sent prices soaring. Gillis says stock in one of his top picks, Business Objects in Paris, which will have about $200 million in 1996 sales, have nearly doubled this year, to 45 a share. Even though the database maker's stock is trading at 61 times estimated 1996 earnings, Gillis says profits will grow about 50% in 1997, making it a buy. Michael Kraland, president of Trinity Capital Partners in Paris, recommends the Netherlands' Axxicon, a leader in compact-disk molds.
Japan's powerful technology industry is one of the few pockets that have not participated in the global technology stock boom. The industry is bogged down by a long recession and by a worldwide surplus of commodity semiconductors. Stock analysts in Japan are placing hold or sell orders on any Japanese high-tech outfits with large exposure to memory chips, including Fujitsu Ltd. and Hitachi Ltd. Both companies recorded big profit gains in the fiscal year that ended in March but are vulnerable to the dramatic falloff in dynamic random-access memory chip prices that has hurt U.S. semiconductor makers as well.
Toshiba Corp. may be the exception to the rule, according to David Bender, a technology analyst at Barclays de Zoete Wedd Ltd. in Tokyo. The giant's profits jumped 102%, to $836 million, in its year ending in March, and Bender thinks its shares are a bargain: They were pounded by foreign selling earlier this year, and investors have yet to pay up for its profit turnaround.
The risks of high-tech investing remain formidable. Many investors have stuck with it because economic indicators point to continued slow growth in the economy. This makes the high-growth high-tech sector more attractive. But if the economy speeds up and interest rates take off, look out below.
By Geoffrey Smith in Boston, with Brian Bremner in Tokyo and Gail Edmondson in Paris