|
|
 |
 |
 |
 |
   |
THE TECH SECTOR'S CHANGING SHAPEIt's not what it was six months ago, so take a new look at your holdingsTech investing used to be so easy. Find a sector leader and buy it. Don't worry about the price, the news, or the economy. Just find yourself a Microsoft (MSFT), a Cisco Systems (CSCO), a Dell (DELL), or even a Yahoo! (YHOO) and put the share certificates in a safe deposit box. The magic of technology will do the rest, and in a few years you'll be a millionaire. Well, things have changed, thanks to the bear market. One of the few wonderful characteristics of bear markets is that they fix things that aren't working right. And the aforementioned method of investing, which has been used by hundreds of well-paid money managers, was a sure sign that something wasn't right with the market. Now that the smoke is beginning to clear from the late-summer collapse of tech share prices, it's time to reassess the sector and take a closer look at the ground rules. Here's a bulletin: They've changed. It isn't that the tech leviathans aren't good stocks to own anymore. It's just that the market has awakened to the idea that there are other good stocks to own that may not be No. 1 -- but that are pretty cheap. The market has also realized that the term "tech" is far too broad to describe a dozen different industries, each with its own business cycle. AUGUST SWOON. In order to appreciate what's different with tech stocks, take a look at what life was like back in July, before a wave of selling hit the sector. At the time, Dell had a trailing four quarters price-to-earnings ratio of 57, and Microsoft's was 55. Meanwhile, second-tier players in each industry, such as Gateway (GTW) and Oracle (ORCL), had trailing p-e's of 26 and 25, respectively. All solid companies with solid growth and solid fundamentals, yet wildly different valuations. By late August, technology stocks had all swooned. But the market leaders were hit the worst. Microsoft was down 14% in August, while Dell was down 9%. In the past two months, these leaders have recovered most of what they lost. But they haven't shot ahead of their sector as they have after past corrections. An amazing sight was to see these companies go up as much as 10% on Oct. 15, when the Federal Reserve cut interest rates for the second time in two months. Tech stocks normally get some bounce out of economic news, but such a dramatic move is usually reserved for banks and retailers. Suddenly, Bill Gates and Michael Dell needed Alan Greenspan to make their stocks move. What happened? In a word, Asia. "We started hearing from technology companies that said they would be indirectly affected because one of their customers would be affected by Asia and would reduce spending," says Hugh Johnson, the chief investment officer at First Albany. "That's why they've suddenly become economically sensitive." An Asia-induced recession in the U.S. could do a great deal of damage to computer, software, and networking companies, whose inflated stock prices have been so heavily dependent on strong revenue growth. NOT INVINCIBLE. Now that fears of a recession have been put on the back burner because of the Fed's rate cuts, it's clearer than ever than there has been a subtle shift in the way investors think about tech stocks. For one thing, it has become apparent that the tech powerhouses aren't invincible. For another, investors have discovered plenty of other companies in the same businesses. "There's tremendous value in second- or third-tier players," says Storm Boswick, an analyst with the Seligman Communications and Information fund (SLMCX). "The leaders have tremendous momentum. But from an investor's point of view, you can buy roughly the same fundamentals at an extreme discount if you go just one or two rungs down the ladder." For example, Boswick points out that BMC Software (BMCS), a maker of enterprise software considered the market leader in that segment, can be bought for a price-to-sales ratio of 10. But lower your rangefinder to Platinum Technologies (PLAT), and you can get a similar, albeit smaller, company in the same business for a price-to-sales ratio of two. "There's no question that BMC makes higher margins and is probably a better-managed company, but the difference in the valuations is so spectacular that you have to look at Platinum," says Boswick. Another example can be found in the networking sector. Market leader Cisco has a projected 1999 p-e of 40, while supposed also-ran 3Com (COMS) has only a 25. If cable modems take off as predicted, though, 3Com will be right in the thick of it. Meanwhile, financial companies, which are experiencing a near-recessionary environment now, are cutting back on router purchases. Since 20% of Cisco's sales are to financial companies, that could have a big impact on its bottom line. S&P computer analyst Megan Graham-Hackett's favorite stock is still Dell, despite its high valuation. "It has little exposure to Asia, and there's no letup in demand for its products," she says. She also points out that its competitors still haven't been able to match its highly efficient distribution machine. The company's success is "all because of the efficiencies of its direct-order business model," she adds. "Dell does it better than anyone else." Most other tech market leaders are much more vulnerable, however, and could become even moreso if Microsoft loses its antitrust case, which will have a profound impact on the tech sector no matter what its outcome. All of this is not to say that the giants of today are going to become the dinosaurs of tomorrow. In the fast-changing climate of the tech world, nothing counts more than market share and cash on hand. It's just that it could be harder for them to keep their stocks on top than it has been in the past.
RELATED ITEMS
|
Updated Oct. 29, 1998 by bwwebmaster
Copyright 1998, by The McGraw-Hill Companies Inc. All rights reserved.
Terms of Use