| BUSINESSWEEK ONLINE : JUNE 14, 1999 ISSUE | |||||||||||||||||||||||||||
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| COVER STORY
Tech Stocks: Technical Difficulties? Not Really Thanks to the Net, tech stocks have running room Technology stocks often get summer jitters, but this year they started in April. Internet mania finally got too loony. Through May 28, the Goldman Sachs(GS) Internet Index had dropped 26% from its Apr. 13 peak, while the broader tech market, as measured by the Pacific Exchange Technology 100 Index, was off 3.6% from its summit. But the nation's top technology investors aren't worried. ''Eventually, we'll head onward and upward again,'' predicts Mark Herskovitz, manager of the Dreyfus(MEL) Premier Technology Growth Fund. The case for tech stocks remains powerful. Technology continues to drive the U.S. economy, and many tech companies are long-term profit machines. Even if a tech company isn't profitable, chances are its revenues are soaring. Later this year, investors may resume buying as they focus on next year's tech earnings, which are forecast to rise 25%, vs. a 17.4% profit gain for the Standard & Poor's 500-stock index, according to analysts surveyed by First Call. Tech stocks have excelled over the longer haul. Since tech's bull market began in June, 1994, the PSE Technology Index climbed 390%, vs. 194% for the S&P. Even with the recent sell-off, the PSE Tech Index is up 18% this year through May 28, vs. 6% for the S&P. The question is when the rally will resume. Tech investors took profits following an extraordinary runup in prices that began last Oct. 10, soon after the Federal Reserve made the second of its three quarter-point cuts in the fed funds rate. Investors are also wary of a possible profit slowdown. After an estimated 43% earnings gain for the first six months of 1999, profit growth for the 61 tech companies in the S&P 500 will slow to 27% in the second half, according to analysts surveyed by First Call. In addition, fears that the Fed will hike rates have put downward pressure on price-earnings multiples. WIDE RANGE. So where do you put your tech dollars now? The giants that once led the market are no longer the shoo-ins they once were. ''It used to be that you couldn't find anything to invest in except blue-chip tech stocks because they had checkmated the industry,'' says Roland Gillis, co-manager of Putnam Investments' Voyager funds. ''The Internet has changed all that,'' he says, because it has opened vast new markets for numerous smaller companies. Investors are eyeing a range of sectors and companies of all sizes. The most attractive areas are those that will benefit from the growth of the Internet. Dot.com companies, telecommunications equipment and service providers, and software companies are all favorites. The sky-high valuations of many of these companies shouldn't be ignored. But technology investors argue that the more important issues for most Internet companies are the strength of its business model, the potential size of its markets, and the quality of its management. America Online(AOL), for example, is rated a buy by 29 Wall Street analysts even though its price-earnings multiple is more than 300 times estimated 1999 profits. Three of the nation's top Internet fund managers prefer entirely different sectors. Ryan Jacob, manager of the Internet Fund, likes media stocks and content providers. Among his top picks are Yahoo!(YHOO), eBay(EBAY), and NBC's(GE) soon-to-be launched NBC Interactive. The reason? Jacob perceives them as leaders in their markets, and ''they have a high degree of leverage inherent in their business models that will let them generate high profits with relatively low fixed costs,'' he says. Despite the high valuations of Yahoo! and eBay, Jacob says they're down considerably from their highs, and ''they're not as high-risk as smaller companies.'' CHRISTMAS PRESENT? Paul T. Cook, who runs the Munder NetNet Fund, prefers Net stocks that focus on business-to-business markets. His top picks include USWeb, which builds Web sites for companies, and Infospace(INSP), which supplies information to Web sites. Neither company is profitable, but their revenues are growing at triple-digit rates. E-commerce stocks are a favorite of Alex Cheung, manager of the recently formed Monument Internet Fund(WWWFX). Cheung expects a massive amount of online retail activity come Christmas, even exceeding last year's rapid growth in cybersales. And that should be a boon for America Online and Amazon.com(AMZN). Pure Net stocks aren't the only place to invest in technology. Managers of diversified tech funds keep only a small percentage of their assets in dot.com stocks and instead are sticking to what they consider to be safer bets. For example, Kevin Landis, manager of three tech funds run by Firsthand Funds, likes Qualcomm(QCOM), the leader in a wireless system called CDMA, which facilitates Web access from cell phones. He says the company is attractive because it should grow faster than competitors such as Nokia(NOKA) and Motorola(MOT). Landis also is bullish on Motorola as a turnaround situation, and on AT&T(T) because he's convinced that its pending acquisition of cable force MediaOne ''will awaken a sleeping giant.'' One way to play the certain expansion of Internet capacity is Aware(AWRE), a company that makes semiconductors that enable fast Net access through copper telephone wire. Gillis likes Aware because he expects its technology to be rapidly adopted by telephone companies. Wall Street expects Aware to earn 37 cents a share in 2000, double this year's estimate. Software stocks have had a dismal first half because customers have slowed down purchases while bracing themselves for the Year 2000 software bug. But many investors believe these stocks will recover in the second half as attention turns to an expected sales rebound next year. Herskovitz likes Oracle's(ORCL) chances of being a big beneficiary of a resurgence in software sales. Whether you prefer Net stocks or safer bets elsewhere, keep an eye on the overall economy in the second half of 1999. Rising long-term rates have already dampened enthusiasm for the tech sector. And if inflation rears its ugly head again, as Fed Chairman Alan Greenspan thinks is possible, that could further crimp the lofty valuations for tech stocks. Even so, aggressive investors cannot afford to ignore these fast-growing companies. BY GEOFFREY SMITH _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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