Rob, re:Akam. You might want to look at this. When things look better I will buy Akami. But, right I'm really trying to limit my buying to companies who already are making a profit.
It appears these days profit potential means shit anymore.
Why I'm not buying tech stocks
By Pablo Galarza
Any time the stock market gets whacked, all the pundits say it's
a good time to find bargains among a group of companies
dubbed the Leaders. And lately, the shares of today's Leaders,
the big-cap tech stocks, are looking mighty alluring. Intel is off
53 percent from its summer high, Microsoft is down 47 percent,
Dell is off 56 percent, and Cisco is down 48 percent. With prices
so low, this has to be a great opportunity to hop on board.
Right? Maybe. "There's a big difference between a good
company and a good stock," says Robert Olstein, president of
Olstein Financial Alert Fund.
Here's why I have reservations about investing in big-cap tech
stocks today. For starters, buying stocks isn't like shopping for
clothes or electronic gadgets. When the price of that DVD
player you've had your eye on drops from $300 to $250, you
know you're saving $50. But when a company's stock price falls
from $80 to $45, it may not be the same company anymore.
Companies are dynamic, and technology companies are
especially mercurial. Their prospects vary with the ebbs and
flows of the global economy, as well as with the fast-changing
competitive landscape within their industry. Tech firms always
face the danger of obsolescence -- better, faster, cheaper
mousetraps come along all the time. And hot products morph
into commodities with alarming speed. Last year, when the
personal-computer business came to be seen as mature,
investors moved their money to the still nascent technologies
like optics and data storage. A tech company, more than any
other, can see its dominant position erode, seemingly,
overnight.
Secondly, I don't think many of the big-cap tech names are
truly cheap. Many trade at higher valuations than they did
before their best periods of growth. Consider Microsoft. In 1990,
with its best days ahead of it, the stock had a price-to-sales
ratio of 6, meaning investors were willing to pay $6 for every
dollar of the company's revenue. From 1990 to 2000, Microsoft
increased its revenues by nearly 1,900 percent -- a
compounded annual rate of 33 percent. Yet in Microsoft's most
recent fiscal year, which ended June 2000, sales grew 16
percent, and in its most recent quarter, the rate was just 8
percent. Yes, it is one of the most profitable companies around.
But why would you pay 13.5 times sales for a company whose
revenue growth appears to be slowing?
Intel is another stock that has seen its headiest growth days.
Investors are starting to recognize that the microprocessor, the
brain inside your computer, is a commodity component inside a
commodity product called a PC. Commodities are priced purely
on supply and demand. And right now, supply heavily outweighs
demand, shrinking the profitability of all things related to PCs. In
Intel's recently reported fourth quarter, average selling prices
for its goods were flat, inventory was bulging, expenses were
up, and gross margins had contracted. Intel told Wall Street
that its first-quarter revenue target would be 8 percent below
the prior year's number, an unexpected drop-off. Oh, and gross
margins on 2001 will dip down below 60 percent. Yet Intel still
sports a P/S ratio of 7. "What do commodity chipmakers trade
for?" asks Fred Hickey of the High Tech Strategist newsletter.
"One times sales." To reach that valuation level, Intel would
have to change hands for $5 a share, an 83 percent drop from
today's prices.
The third reason I shy away from big-cap tech stocks is that so
many mutual funds, hedge funds, institutional investors, and
retail investors already own them. This point was driven home
for me when I recently asked a couple of big-cap growth fund
managers why they were talking up Cisco's formidable
competitor Juniper Networks. The answer? They already owned
enough Cisco. That's a problem. When all the big buyers feel
they have enough of their money in a stock, you've got to
wonder who's left to push the price up by buying more.
So if I don't like the tech Leaders, what do I like? Companies
that are assuming the leadership of the new world, the one
based on Internet Protocol, the language of the Web. Names
like semiconductor makers PMC-Sierra and Broadcom, software
companies such as WinRiver and Akamai, or networking firms like
Juniper, Redback, and Sycamore. Of course, these companies
are wildly overpriced. But I would look at any big pullback that
wasn't related to a change in the companies' fundamentals as
an opportunity to start accumulating stock in tomorrow's
leaders, not today's. |
