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KEA positively mentioned.
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The future of tech stocks
Buy and hold technology investors need to look at long-term trends
October 7, 1998: 9:50 a.m. ET
Tech Stocks
NEW YORK (CNNfn) - The rapid rise and fall of many technology stocks can make it difficult for long-term investors to predict the future of the sector, but some trends make the crystal ball more clear.
Nowhere is short-sightedness more evident than in the technology area, where Wall Street is currently zeroing in on upcoming third and fourth quarter earnings.
The result? Wild gyrations in most areas of high tech shares and a Nasdaq Composite which can't seem to get up off its knees and form a solid rally.
Average investors who've chosen to follow the "buy and hold" strategy face a difficult dilemma with all of the tech turmoil going on.
The fast pace of the sector has flattened many formerly-praised companies (remember Pointcast?). Long-term types are left to wonder if they'll be holding onto the next casualty or whether to move from one tech stock to the next.
Internet is the key
"Buy and hold" investors who have a craving for tech stocks and the higher returns they can bring don't have to give up on them and settle for the more reliable -- and boring -- stocks. They have an ally in the Internet.
The rise of the Internet has created a driving factor behind technology stocks and, despite some downturns, stock watchers like Alan Loewenstein think it will continue to drive related stocks higher over the next five to seven years.
"The Internet is the one area where you're going to have the most explosive growth," said Loewenstein, an assistant portfolio manager for John Hancock's Global Technology Fund (NTTFX).
Networking stocks will be one of the beneficiaries of this, he said.
That's right, networking stocks. The ones that have been battered recently because some telecommunications companies have said they won't meet their earnings targets because of slowdowns.
"On the data networking side, if you're going to have the Internet be more of a mainstay, then you're going to have to put in the infrastructure," said Loewenstein.
Cisco Systems (CSCO) and Ascend Communications (ASND) should benefit. Investors who are interested in these stocks will also find them cheaper to buy as Cisco and Ascend share prices have declined recently.
However, Internet stocks won't be an across-the-board sure bet, said Roger McNamee, a general partner at Integral Capital Partners.
While acknowledging the Web's importance, McNamee predicted "The Internet's going to look very different from the way it looks now. An awful lot of business models are going to look a lot less attractive in a few years."
Some of the biggest names in tomorrow's Internet might not yet be created but McNamee said one company which might be ahead of the game is Inktomi (INKT), a networking software company.
Inktomi's strength, he said, is its technology can be used to increase the efficiency of network performance and can gain more widespread acceptance as use of the Internet increases.
"Inktomi stepped forward with a model where they get paid every time the Internet grows. They're not a fluke," said McNamee.
Winners and losers
Not all companies are equally able to adapt to the changing nature of the Internet and McNamee said some of the major sectors of today may find themselves struggling in the future.
Much of today's technology market capitalization, he said, is focused on industries which are rapidly maturing, such as semiconductor firms. In particular, personal computer firms could be less interesting to investors in the future.
One long-term trend in the technology sector has less to do with computers and software and more to do with the people who run them, according to Loewenstein.
"Another trend is outsourcing," he said. "Where companies once hired a technology team to handle their needs, they now outsource that work to other firms."
Keane, Inc. (KEA) could be one of the ones to best ride this trend. Keane, based in Boston, helps corporations, government agencies and healthcare firms develop applications for their workplace, lessening the need for these companies to hire the personnel themselves.
While "buy and hold" investors are focusing on the long-term trends in stocks, in the shorter term technology stocks, particularly chips, could also begin to turn things around, according to Jonathan Joseph, technology analyst at NationsBanc Montgomery Securities Inc.
Semiconductor stocks have been hit hard by an general downturn in the global marketplace, particularly Asia, which has reduced demand. This trend prompted (MOT) last month to suspend the construction of a highly-touted $3 billion plant in Virginia.
Joseph said Asian-related problems were beginning to be resolved, however.
"If the Japanese economy doesn't go into an outright depression, we could actually begin to see a little recovery on the component side," he said. "And believe it or not, we think the semiconductor sector could begin a little re-acceleration over the next six to eight months."
Another concern about technology firms in the short-term could also be somewhat overblown, according to Scott Chapman, portfolio manager for the Highmark Growth Fund (HMGRX).
The softening of the U.S. economy has led to fears the capital spending that has been driving technological growth in the country will begin to lessen.
"That could happen, although the percentage of technology in relation to the overall capital spending has been increasing over the last 10 years," he said. "So while there may be a capital spending cutback, the percentage of technology spending is ever-rising."
-- by staff writer Randall J. Schultz
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