Cover Story: Where To Invest '96: Strategies For Stocks: Technology Stocks
TECH'S TEMPERATURE WILL STAY HIGH
Investors who have been smart or lucky enough to own technology stocks are licking their chops. Even after a recent retreat, tech-stock indexes have more than doubled--and many stocks have tripled, quadrupled, or more since the juggernaut got started in mid-1994. But is tech still smart for 1996?
You bet. "We're only in the middle of a long, multiyear technology cycle," says analyst Robert Austrian of Morgan Stanley & Co. Indeed, the popularization of the Internet and online services as a communications and commercial vehicle is in its infancy. The linking of computers into networks as a productivity-enhancing tool also has a long way to go. Companies that can capitalize on these trends are well-poised for further gains, and investors can buy many of the stocks well below their 1995 highs (table).
Although many tech stocks have pulled back, not much looks cheap. But what defines "cheap" for a technology stock is how it is priced relative to where the market thinks it's going, not where it has been. For instance, everyone agrees the Internet is an opportunity of mammoth proportions. But just how much revenue it will produce for the red-hot Internet companies such as Netscape Communications Inc. is anybody's guess. Charles A. Morris, who runs the T. Rowe Price Science & Technology Fund, estimates that Netscape, at 123, is valued as though it were a software company with annual revenues of $1 billion. That is pretty rich for a company whose third-quarter sales were $21 million. If Netscape reaches $2 billion in a few years, today's price will in retrospect be a steal. But if growth falls short, watch out below.
BREWING JAVA. That's why Netscape and its ilk are speculative. There is less risk but still plenty of potential reward for investors in more established companies such as Bay Networks, Cisco Systems, Sun Microsystems, and 3Com. All are leaders in designing and manufacturing the hubs, routers, and switching gear that link computers to networks. In addition, Sun developed the Java programming language that many believe will become standard for the Internet. "All these companies are going to do extremely well," says John C. Levinson, who runs a tech-stock hedge fund at Lynch & Mayer Inc.
The New Year should also be profitable for software companies--mainly those that serve the corporate rather than the home user. Levinson thinks Computer Associates International Inc. in Islandia, N.Y., has a winner in its CA-Unicenter software suite for client servers and will also realize savings and synergies from its acquisition of Legent Corp. Analyst Frank Michnoff of Donaldson Lufkin Jenrette Securities Corp. says that the little-known Platinum Technology Inc. should reap rewards from its makeover.
Absent from many buy lists are semiconductor stocks, even though their prices are down. "Be wary of companies whose chips are commodity items that plug into a PC," says Morris.
But there's more to semiconductors than Pentium and memory chips. Morris likes companies whose products are more proprietary or are geared toward networks rather than PCs, such as Analog Devices, LSI Logic, Maxim Integrated Products, and Xilinx.
William D. Witter, whose eponymous firm makes considerable technology investments, is a major shareholder in the Israeli company Tower Semiconductor Ltd. By making chips for companies such as Hewlett-Packard, Motorola, and
National Semiconductor, Tower's fate, Witter figures, isn't tied to the life cycle of any one product. Witter says Tower also benefits from a probusiness government policy: a low 20% tax rate on profits and a hefty 38% subsidy for capital investment.
Witter says he'll consider any stock with good growth prospects at a reasonable price. But his biggest holdings are all tech stocks. The reason is simple, he says: "That's where the growth is."By Jeffrey M. Laderman in New York