High tech is fast becoming the market's neglected stepchild, but technology stocks are still best for the long haul. So says Michael Murphy, editor of California Technology Stock Letter, who is putting his money on two groups: electronics and biotech.
Giant chipmaker and microprocessor maker Intel (INTC) is his top pick in electronics. And in the biotech sector, Vical (VICL), a lilliputian developer of pharmaceutical products for human gene therapy, is his favorite.
Murphy, author of a new book on tech stocks, has an unusual way of assessing companies: Since research and development lead to new products, he views R&D as the key to growth. "By adding the R&D spending to earnings, we get a better picture of the real value." Before a company's R&D pays off, a stock is usually depressed. "That's when we buy," he says. After R&D kicks in with new products, the sales and earnings climb--and the Street bids up the price. "That's when we sell," says Murphy.
He insists that Intel, which funnels vast sums into R&D, is a bargain at its current price of 73. For five years, its earnings have grown twice as fast as those of the Standard & Poor's 500-stock index, notes Murphy. In the coming five, its earnings should grow 20% annually, vs. 8% to 10% for the S&P.
Furthermore, the S&P trades at a price-earnings ratio of 22, while Intel has a p-e of 18. "So you have a stock that has been robustly outpacing the market--and selling at a big discount," notes Murphy. He believes that Intel will climb back up to 100 before the end of this year. (It hit 102 in early August, 1997.)
R&D also gives Vical's stock a huge potential, he says. In November, Merck bought a $5 million stake in Vical--and Merck may fork over a further $18 million when it uses Vical's DNA technology in the vaccines it is developing against viruses that cause AIDS and hepatitis. Vical stock rose to 17 on that news, before settling back to 12 5/8 on Jan. 6.
Murphy thinks Merck will file for FDA approval of its AIDS vaccine sometime this year. "When that happens, you'll see the shares of Vical fly to the heavens," says Murphy. Meantime, he thinks Vical will hit 23 this year, based purely on human gene therapy against autoimmune and infectious ailments and cancer. Gene therapy seeks to prevent or treat diseases by introducing specific genes into cells. The genes cause the cells to produce the proteins needed to correct or control diseases.