Sunday July 23 11:56 AM ET
Investors Refine Taste for Tech Stocks
By Eric Wahlgren
NEW YORK (Reuters) - This time last year, investors were tossing
technology stocks into their shopping carts with about as much restraint as
frat boys buying beer for a boozy bash.
What a difference a year makes. Buyers have sobered up big time when it
comes to the high-tech sector, now carefully separating out the good stuff
from the swill.
A growing number of investors only have a tolerance for companies that will
age well with time rather than those that offer a quick investment fix --
followed by a nasty hangover when the stock tanks.
``I am being a lot more discriminating and patient, waiting for things to come
into my price range,'' Bernie Horn, Portfolio Manager for Polaris Global
Value Fund, said. ``In the past, if you didn't buy it in the morning, the price
was higher in the afternoon and you lost performance. Things have changed.''
Internet Shakeout Has Changed Investor Mindset
The Internet shake-out earlier this year and the ongoing debate over how to value tech stocks have forced Wall
Streeters to rethink the way they go about picking tech shares.
Although the Nasdaq market appears to be on rebound, albeit a rocky one, the advance will largely be limited
to choice names that can quickly prove their worth, analysts say.
In other words, the party's over for companies like Internet healthcare concern Drkoop.com Inc.
(NasdaqNM:KOOP - news), which recently laid off 35 percent of its workforce amid a cash crisis. Shares of
the company, named after former co-founder Dr. C. Everett Koop, have nose-dived to less than 2 from a high
of 45-3/4 as Wall Street has lost patience with dot-coms that make little or no money.
Friday, privately held Internet healthcare news company MillenniumHealth Communications Inc. offered to
merge with Drkoop.com for an undisclosed sum.
``I guess last year we were a little bit more liberal when it came to business models and the time frame for
getting companies to break even,'' said Christopher Ely, co-manager of Loomis Sayles Small Cap Growth
Fund in Boston. ``To actually see companies operate as public companies has taught us to be a lot more careful
about how they earn those revenues and how they make use of their investments.''
Investors Pin Their Hopes On Three Main Sectors
Despite the decreasing confidence in technology as a sure bet investment, Wall Street pros said they believe
there are three sectors that still offer considerable promise.
With experts predicting exponential growth in communications, Wall Streeters say they are concentrating a lot
of their buying in the area.
``That is where the good growth is,'' said Francis Gannon, senior Portfolio Manager, U.S. equities, at
SunAmerica Asset Management in New York.
In particular, fiber optic firms, which have pioneered the use of fine glass instead of wires to transmit huge
amounts of information rapidly via light beams, are getting a lot attention. Among some of Gannon's favorite
names are Corning Inc. (NYSE:GLW - news), JDS Uniphase Corp. (NasdaqNM:JDSU - news) and CIENA
Corp. (NasdaqNM:CIEN - news).
The American Stock Exchange's network index (^NWX - news), which includes CIENA, but excludes JDS
and Corning, had so far risen 51 percent this year by Thursday, versus a less than 3 percent increase in the
Nasdaq composite index (^IXIC - news)
Semiconductor Companies Also In Focus
Another sector in Wall Street's crosshairs is the semiconductor group, which makes the tiny electronic brains
that run everything from computers to cell phones to refrigerators.
No surprise there. The Philadelphia Stock Exchange's semiconductor index (^SOXX - news) has shot up 63
percent for the year.
``We think the semiconductor cycle is going to be quite extended for some time this time around because it
includes telecoms,'' said Joseph Battipaglia, Gruntal & Co.'s chief investment strategist and long-time market
bull. The weighting of technology in Gruntal's portfolio remains a hefty 40 percent.
As more and more consumers turn to wireless phones, hand-held devices and other electronic gadgets to make
their lives more convenient, the logic is that the demand for the chips that power these products will continue to
swell.
Names mentioned include PMC-Sierra Inc. (NasdaqNM:PMCS - news), Intel Corp.(NasdaqNM:INTC -
news) and Texas Instruments Inc. (NYSE:TXN - news).
Although investors are far more circumspect about plowing money into Internet shares than they were a year
ago, the one hot area that is still drawing a lot of cash is Internet infrastructure. Companies in this segment are
the ones building the so-called Internet backbone, or network of routers, switches, communications lines and
computers that run the information superhighway.
Among the companies on the radar of Bob Grandhi, chief investment officer of the Monument Funds Group in
Bethesda, Md., is Akamai Technologies Inc. (NasdaqNM:AKAM - news), which speeds the online delivery of
Web pages, audio and video.
``There are tremendous growth opportunities in the infrastructure space including software and hardware
companies that have some cutting edge technology that makes the Internet faster, cheaper, affordable and
available,'' Grandhi said.
``Path To Profitability'' A Must To Get To Investors' Hearts
Gone are the days when a flashy concept and only the promise of profits to come in the distant future were
enough to win over investors. After legions of buyers were burned by the dot-com consolidation in the Spring,
a company's ability to generate profits has once again become a key investment criterion.
Using Wall Street argot, money pros say these days they only want companies that can indicate at the very least
``a path to profitability.'' And while last year maybe that road could have been a long one, investors now want
companies to be able to travel that route from six months to a year.
``Six months ago, profits were not a focal point when compared to growth potential,'' Grandhi said. ``But now,
if they are not profitable, they must become profitable in a short period of time, no longer than a year. We also
want to see a strong business plan with a strong management team.''
After the Nasdaq slid 37 percent from its March 10 high of 5,048.62 before troughing, the bottom line matters
nearly as much as the top line, analysts say.
Wall Streeters have scaled back their expectations for tech stocks, once seen as a sure fire way to make easy
money. For instance, the Nasdaq index, which rocketed more than 85 percent last year, is seen by some
advancing only in the single digits in 2000.
What is a safe bet these days in the volatile technology sector?
``Food,'' said Bill Meehan, chief market strategist at Cantor Fitzgerald. ``When it comes to technology there
are no safe bets.'' |
