Here's an article on picking software companies during the decline:
See how tech stocks are doing
WASHINGTON (Reuters) - If you're the cut and run
type, don't even waste your time reading the rest of
this column -- it's about how to shop for stocks in a
sell-off. Specifically, how to shop for risky software
stocks in the midst of a scary sell-off.
Why would anyone want to do that? For the same
reason that you would buy a winter coat on sale in
April or a gas grill in October.
They are cheaper and you're not really expecting
the demand for coats and grills to dry up altogether.
You know you're going to want them again next year,
and you just sort of have to hope the ones you select
are still functional and stylish when their turn rolls
around again.
The same may be said of high tech stocks, but they
are a lot trickier. The market for computers, software,
high tech industrial solutions and more is not going
away, though it's a lot easier to choose a coat than it is
a software company that will keep your portfolio
warm two years from now.
The prices for many of these companies are a lot
better than they were two weeks ago, which is not to
say they are selling at prices, relative to their earnings,
that would traditionally be considered good values.
Nevertheless, long term investors should celebrate
the stumbles as true buying opportunities.
If you're looking to pick up a software company or
two, consider these pointers from Bill Farrell and
Chuck Phillips, two industry analysts with Morgan
Stanley Dean Witter.
Beware of companies that are falling out of
proportion to the market's overall slide. Most
technology firms that stumble badly never
recover, Farrell and Phillips said. Instead, seek
companies that are strong and possibly costly,
but that have edged back a bit because of the
sell-off.
If there has been some bad news, expect more.
The two analysts call this the cockroach theory:
If there is one on the counter, there are
probably 10 more in the wall. A software
company that misses its earnings estimates
probably was stretched too tight and will not
recover quickly. "Bad quarters come in twos
and threes and are not isolated events," Farrell
and Phillips report.
Look for companies that are really good at
marketing. That's the sign of a successful
software company, not, as the naive might
believe, the best product. A company that has a
good image, sales force and marketing
campaign can overcome product deficiencies,
win market share and keep products in
consumers minds for years to come.
Do not assume a good product is a winner, and really do not assume that an early stage
product
is a winner. The truth is that most software
consumers are not looking to buy the latest,
sharpest, newest product. They are looking for
something that is dependable and that they can
live with for a few years without upsetting their
bank books and their computer systems through
constant upgrading. It is the companies' own
infrastructure that will make a software
company a winner. That means you should
shop for companies that have decent sales,
good management, stability, a good distribution
system, an open market, good partners and tall
barriers to entry.
Do not assume up is the only direction.
Software profits are cyclical.
A new release can mean big earnings in a hurry;
that can slow down until the next upgrade or new
release comes along. Software prices can move down
too. As the market gets older, vendors have to
broaden their markets to keep earnings up. That can
mean lower prices, and the need to sell more products
just to keep the same profits.
--Linda Stern is a free-lance writer who covers
personal finance issues for Reuters. Any opinions
in the column are solely those of Ms. Stern. |
