| BUSINESSWEEK ONLINE : JUNE 26, 2000 ISSUE | ||||||||
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| COVER STORY
Searching for Growth? Look Again at High Tech The leaders may be good plays, but not all of them After tech stocks' biggest decline in a decade, you might think investors have lost their appetite for them. Well, think again. The sector is among the market's most promising for the second half, say many big investors. Sure, there are worries that high interest rates and a slowing economy will cool tech's red-hot revenue growth. But the big money is betting that slower growth is not going to stop the Information Revolution nor the Internet's explosive growth. Tech stocks should be part of every long-term investor's portfolio, say the experts. The tech component of the Standard & Poor's 500-stock index has outperformed the broader S&P 500 index in six out of the last seven years. And for good reason: The earnings-growth rate for tech has dwarfed earnings gains in the rest of Corporate America. John Ballen, chief investment officer for Massachusetts Financial Services in Boston, says tech stocks are still among his largest holdings because ''even if [the] economy slows down, we'll see strong earnings growth out of tech compared to the S&P 500.'' ''TERRIFIC.'' Analyst estimates for technology-company profits in 2000 have been rising all year--even through the sell-off. Last October, analysts forecast a 28% growth rate for 2000. Now, the current estimate is 31%, says Chuck Hill, research director at First Call Corp. in Boston. ''No matter how you slice the numbers, tech earnings look terrific,'' both for the rest of this year and 2001, he says. Still, tech investors are being highly selective in placing their bets. The spring sell-off and the sharply increased volatility of tech stocks have made investors wary of more speculative dot-coms and any company that isn't one of the leaders in its business. ''The market will discriminate in favor of companies with solid franchises and business models,'' predicts Mark Baribeau, who co-manages $2.4 billion in large-cap growth stocks at Loomis, Sayles & Co. in Boston. At the same time, the buy-at-any-price psychology that led to an explosion in tech-stock prices from October through early March hasn't been completely broken. When investors buy tech companies, they still pay dearly. When the Nasdaq peaked on Mar. 10, its top 100 stocks, including many leading tech companies, traded at a blistering 165 times trailing earnings, vs. 29 for the S&P 500. By June 9, the Nasdaq 100 price-earnings ratio had dropped to 132, but that's still more than four times that of the S&P as a whole. Top tech investors favor leaders in the networking, software, and specialty-semiconductor sectors, including Cisco Systems (CSCO), Oracle (ORCL), and Network Associates (NETA). Net-investing pros are targeting a handful of the biggest Web names, including Akamai Technologies (AKAM), Ariba (ARBA), and Yahoo! (YHOO) But they don't come cheap. Ballen likes Cisco even though its p-e ratio recently stood at 115 times analysts' estimates of 53 cents a share in 2001, barely changed from a p-e of 116 on Mar. 10. Ballen says Cisco dominates the networking business, and its profits are growing by around 50% a year. He argues that the price tag isn't excessive considering Cisco's huge earnings-growth rate. Says Ballen: ''Everything else being equal, if you grow earnings at 50% for four years and the stock stays flat, the p-e would be at 20 in four years.'' Oracle is a slightly better bargain. Ballen says the software powerhouse recently sold at a p-e of 102 times estimated 2001 earnings, down from its Mar. 10 high of 117. Ballen thinks that of all the large software companies, Oracle ''is the only one that doesn't have a lot of issues,'' such as the antitrust case decimating Microsoft Corp.'s (MSFT) stock. Analysts expect Oracle's earnings growth to come in at 27% next year, but Ballen thinks those estimates ''could prove to be very low.'' STAY WITH STRENGTH. Networking companies and specialty-chip companies were among the top performers in the first half, and some tech investors are sticking with those companies to start the second half. James D. Oelschlager, co-manager of Red Oak Technology Select Fund, likes TriQuint Semiconductor (TQNT), JDS Uniphase (JDSU), and PMC-Sierra (PMCS)--all selling at enormous prices. TriQuint recently traded at 82 times estimated 2001 earnings, while JDS Uniphase stood at 184, and PMC-Sierra at 165. Oelschlager says that doesn't matter. They're all fast-growing companies that should withstand any industry shakeout. ''The strong are getting stronger,'' he says. Firsthand Funds' Kevin Landis, who oversees $6.9 billion in tech stocks, is focusing on Internet infrastructure. He favors companies building digital subscriber line (DSL) technology--an alternative to cable modems for high-speed Internet access--and companies building fiber-optic networks in major metropolitan markets. His picks include Ciena (CIEN) and Advanced Fibre Communications (AFCI). Alberto V. Vilar, who oversees $7.5 billion in tech investments at Amerindo Investment Advisors Inc., has big stakes in Akamai, Ariba, Sycamore Networks (SCMR), Yahoo!, and eBay (EBAY). ''They're having an explosion in their fundamentals,'' he says. Revenues at Akamai, a leading player in speeding the delivery of Web pages to PCs, should jump from $2.7 million at the end of 1999 to $77 million by yearend, according to First Call, and, says Vilar, ''it has a fighting chance of being another Cisco.'' Vilar was among the few to correctly predict this spring's crash in tech stocks. He thinks that while the market will retest its lows in the third quarter, it will rally again in the fourth quarter, pushing the Nasdaq into positive territory by the end of the year. All told, he thinks the Nasdaq could finish the year at around 4000--near where it started. In recent months, many day traders learned that there is a serious downside to tech stocks. History shows that long-term investors are still better off with them than without them. By GEOFFREY SMITH _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 RELATED ITEMS Searching for Growth? Look Again at High Tech TABLE: High-Quality High Tech For the Record: James D. Oelschlager INTERACT E-Mail to Business Week Online | |||
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