| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||||
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| WHERE TO INVEST -- STRATEGIES FOR STOCKS
Stocks: A Turbocharge from Tech It's making companies more efficient, justifying higher stock prices Tap the words ''Internet investing'' into one of the Web's search engines, and you're sure to find sites that teach you how to invest on the Net. Or stories about people who chucked their jobs to day-trade online. Or references to twenty-something billionaires who got that way by taking their ''dot.com'' companies public. But the real story of Internet investing is far more sweeping. The Internet is the instrument of the Information Age, transforming how we work and live and how businesses and economies operate. The Net is to the 21st century what the automobile was to the 20th and the railroad to the 19th. The Internet gives businesses opportunities to open up markets and cut costs that were unimaginable a few years ago. And that, all by itself, has given the stock market an enormous boost in valuation--a boost so strong that some pundits think the market is anywhere from 40% to 50% overvalued and heading for trouble. Most pundits have been screaming about overvaluation for three years. If the market continues to climb in the face of models that say it should fall, then maybe it's the metrics that are out of whack. Jeffrey M. Applegate, investment strategist for Lehman Brothers Inc., says the bearish calls are predicated on the idea that valuations must revert to the long-term average. ''Our view is that the mean is moving higher, largely due to technology and globalism,'' says Applegate. ''Avoiding U.S. equities based solely on mean-reverting valuation arguments will be a mistake.'' Applegate is forecasting a 13% price gain for the Standard & Poor's 500-stock index next year. The major beneficiaries of the Net's rise are the high-tech companies--they're building it. That's why the Nasdaq Composite, which includes most of the tech giants, is up an astounding 65% in 1999. Tech now makes up about 26% of the weight of the S&P 500 and most of its 1999 return. Toss in telecommunications companies--which link disparate computers into an Internet--and the percentage of direct Net-related stocks goes up to about 35%. But that's only where the impact of the Internet begins. Financial companies are really bits-and-bytes companies, moving data rather than physical goods. They're tech users. So are traditional retailers, who are investing in technology to compete on the Web or against the startups setting up shops there. For manufacturers, the Net is a weapon to increase plant efficiency and develop closer links with suppliers and customers. STEADY ON. The stock market has a lot more going for it than the Internet. The business cycle has been significantly muted. Real growth in the U.S. has averaged a healthy 4.1% since 1996, a pace not seen since the 1960s, another period of high market valuation. But the economy in the 1960s was far more variable, subject to wider swings. GDP growth has shown remarkably little year-over-year variation. Recessions, which bludgeon stocks, used to occur every three to four years. There's been just one in the past 17. At the same time, corporations have become smarter about wringing out higher returns. They've spent heavily on technology that has allowed them to increase productivity, enabling them to pay higher wages in a tightening labor market without pushing up prices. Productivity gains have reduced tangible asset needs by more than $245 billion in the 1990s, according to Michael J. Mauboussin, U.S. investment strategist for Credit Suisse First Boston. Adds Alan D. Levenson, chief economist for T. Rowe Price Associates Inc.: ''Less risk in the economy and greater returns and efficiencies by companies mean there is less risk in owning stocks.'' Less risk, of course, does not mean no risk. The Federal Reserve hiked short-term interest rates three times in 1999, and many on Wall Street think there's at least one more tightening to be had early in the new year. But should the tightening go much farther than that, stocks could be in for a spill. Global trade is a wild card. The market is betting that China will join the World Trade Organization, but the U.S. Congress could thwart that. And any backpedaling on free trade could roil investors. In that light, the failure of the recent WTO meeting to set a new agenda for talks is not good. Still, ''the Seattle meeting was a short-term setback,'' says Charles W. Kadlec, chief investment strategist for Seligman Advisors Inc. ''People can protest, but it's not going to stop globalization.'' There are other big pluses for the market: Earnings for the S&P 500 companies, up a surprisingly strong 14.4% in 1999, are forecast to gain 15.8% in 2000. Merger-and-acquisition activity continues to be robust. The Federal budget remains in surplus, and tax hikes--especially in an election year--are not likely. The public appetite for equities will remain strong. Edward M. Kerschner, investment strategist for PaineWebber Inc., says the number of people in the 45-to-54 age bracket--who save and invest the most--should peak at 18.7% of the population in 2007 and remain at that level for at least another five years. Kerschner, however, argues that the rate of market gains in the next decade will be slower than the last. A good piece of the bull market's returns since 1982 came from the 70% decline in interest rates. ''Now you will really need to be a good stockpicker,'' he says. Investors already are getting a lot more selective. Though the S&P 500 is up 15.3% (through Dec. 10), 275 of the 500 are down, and half of those losers are down more than 20%. TEST OF TIME. Tech and telecom companies will continue to sparkle, but they're not the only ones. Kerschner says we're in an age of affluence, when money is often more available than time. That's why he favors companies that can save time for consumers, such as Costco and Wal-Mart, or those that sell leisure time experiences, such as cruise operator Carnival Corp. CSFB's Mauboussin finds Information Age opportunities even in nontech companies by focusing on balance sheets. ''Companies that manage their capital aggressively can translate that to a higher stock price,'' he says. Mauboussin likes companies that use technology to shorten the time when a company pays suppliers and is paid by its customers. On that count, Anheuser-Busch, Best Buy, Boston Scientific, Chiron, Gateway, and Wal-Mart are attractive stocks. In the new millennium, the best opportunities belong to the companies that build and maintain the Internet or to those that can harness its power to their fullest advantage. By JEFFREY M. LADERMAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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