ASND made the Money Magazine radar screen (see BOLD), but Money
only recommends CSCO among all the companies in its group. The
only reference to ASND is in a side-bar at the end of the article
(at least is now exists):
3/1/98 Money 116
1998 WL 8242657
Money Magazine
Copyright 1998
Sunday, March 1, 1998
Issue: March 1998 Vol. 27 No. 3
Tech Stocks
The Secret to Tech Stocks You can get rich with tech--or lose your shirt. The
key: managing your risk. Our three-part program will show you how.
Duff McDonald Reporter Associate: Vanessa Richardson
See also pages 120, 122 of same issue
Who wouldn't be enticed by tech stocks? They've turned Microsoft
employees into millionaires, made Michael Dell of Dell Computers the
richest man in Texas and helped Intel become a household name. Even
a novice investor who blindly put $100 a month into large tech stocks
beginning in 1990 would today have $26,000--31% more than the same
investment in the S&P 500 would have produced.
There's just one catch: risk. Tech stocks rise and--just as
important--fall with alarming severity. It's easy to be scared away
by the prospect of sudden and devastating losses.
But you shouldn't be. In fact, it would be foolish not to include
technology in your portfolio. "What was a small, specialized part of
the economy in the 1970s should account for about 17% of the GDP in
1998," says Michael Murphy, editor of the California Technology Stock
Letter and author of Every Investor's Guide to High-Tech Stocks and
Mutual Funds. All together, technology contributes some $1.5
trillion to the economy and is growing 20% a year. That means tech
is responsible for about three percentage points of growth in an
economy that expanded only 3.7% after inflation last year--and will
be lucky to grow 2.5% this year. "Technology is the economy these
days," says Bruce Lupatkin, director of research at Hambrecht & Quist
in San Francisco.
So how do you take advantage? You don't need to understand how a
computer chip works or how many bits there are in a gigabyte. What
you do need is a strategy for dealing with the inevitable turbulence.
That's what this article is designed to provide--along with some
specific investment recommendations. You'll still have to endure
some ups and downs. But rather than be victimized by them, you'll be
poised to profit.
The fact that we are addressing tech stocks right now is no
accident: Over the past six months, tech has suffered a significant
sell-off--which to us signals a buying opportunity. Just look back
to March 1996, when Money last ran a major feature on tech investing,
following 20%-plus drops in top-quality tech stocks. Readers who
bought and held the industry leaders we profiled have reaped 91%
average profits, compared with a 52% return on the S&P 500. Such
momentary tech declines allow you to scoop up super stocks at bargain
prices.
So which ones should you scoop up, and in what order? The three
sections below spell out our program. As we've said, it's not for
the faint of heart. But disciplined investors should be rewarded
handsomely.
GETTING YOUR FEET WET
When it comes to building a tech portfolio, the best place to
start is with a mutual fund--though not for the reason you might
think. Yes, mutual funds offer quick and easy diversification among
different stocks. But when it comes to tech-oriented funds, there is
another advantage: the opportunity to diversify easily over time.
What we're proposing here is what's generally called dollar-cost
averaging--making investments in a fund on a regular basis, as though
you're on an installment plan. With tech stocks, this procedure
delivers extra punch. If you invest a set amount every quarter, say,
your contributions will buy more fund shares when prices are
depressed and fewer when prices are high. Since tech stocks are
highly volatile, dollar-cost averaging has maximum impact, because
the more prices swing, the more shares you buy when prices are
depressed.
T. Rowe Price Science & Technology (800-638-5660) is an ideal fund
to consider. While the array of tech funds available to investors
has expanded dramatically in recent years, this reliable stalwart has
much to recommend it. For one thing, there's no sales load. For
another, it is truly diversified across the sector and even includes
some health-care names. Finally, the fund's manager, Chip Morris,
has demonstrated a keen ability to deliver top long-term gains.
While the fund has hit trouble spots along the way (last year, for
instance, Morris turned in a subpar 1.7% return), the fund has
returned an average of at least 21% annually over the past three and
five years.
ZEROING IN ON KEY PLAYERS
After you build up a stake in a first-rate tech fund, it's time to
consider adding some individual stocks. This course may seem
dangerous in a sector where shares can drop en masse by 20% and where
specific names can decline far more. But if you have a long-term
perspective, remind yourself: Your chances of seeing your company go
belly up are remote when you concentrate on the best-established tech
stocks,
And individual stocks do have an advantage over mutual
funds--namely, cost. A tech fund's annual expenses generally run
from the T. Rowe Price fund's 0.97% to as much as 3%. Those costs
eat directly into your returns. With stocks, you don't have to give
up that slice of your profit.
It's generally safest to buy the shares of firms with annual sales
of at least $3 billion that dominate the most important areas of
technology (see the box on the facing page for an outline of the
major subsets of tech). These stocks will still suffer short-term
ups and downs, but they're also the ones most likely to grow in step
with their industry--because they often are the industry (or at least
a large chunk of it). And these are precisely the companies that are
in the best position to make the multibillion-dollar investments
essential to stay at the forefront of their fields.
On the other hand, you shouldn't assume that just because a tech
company dominates its market its stock is always screaming to be
bought. Tech names can run up in price, and you need to make truly
timely choices when you decide to commit your capital. Several of
the highest-profile tech names--including Microsoft and Dell
Computer--don't seem that attractive to us just yet, despite recent
price drops (see the box on page 122). Others, however, have reached
a level at which they're downright savory.
To size up growth investments like those in the tech arena,
analysts often compare a stock's price/earnings multiple with its
projected earnings growth rate. As a general rule, stocks with P/Es
higher than their growth rates for the year ahead are the most
volatile. (Pros divide a stock's P/E by its growth rate to calculate
the PEG ratio; a ratio above 1 means the stock is most suitable for
aggressive investors.) We've relied on that benchmark, along with
several others (it's usually a big plus if companies have debt equal
to less than 25% of their total capital, for instance, and if they
invest 7% or more of their annual revenues in research and
development). We also grilled some of the most respected tech
investors and analysts on Wall Street for their best ideas right now.
Most of our finalists were in sectors other than telecommunications,
which is the single largest tech sector but the slowest growing
overall. Here are four stocks we identified that score well on all
points.
Compaq is the largest of the four in terms of revenue, the
undisputed king of personal computers even before the January
announcement that it planned to acquire Digital Equipment for $8.6
billion. This new move allows Compaq to expand more aggressively
into the corporate computing world. "Compaq already had the broadest
product line in the country, ranging from $599 boxes to $250,000
network servers," says Ashok Kumar of Loewenbaum & Co. in Austin.
"Now it's even broader."
After a dramatic realignment of its business in 1997 to include
direct sales--selling PCs directly to consumers and small businesses
instead of through computer retailers--Compaq has confronted rivals
Dell and Gateway head on. The acquisition of Digital sets Compaq up
to challenge the big boys of the computer business (IBM,
Hewlett-Packard and so on) in the lucrative $200 billion market for
high-end computer systems and service--a business that carries higher
profit margins than PCs and should help boost Compaq's already
industry-leading 28% gross margins.
Although the overall PC industry is growing only 15% a year,
market share gains should continue to propel Compaq's earnings growth
at 25% a year, says Kumar, who is upbeat about the company. And
while some analysts cited possible short-term integration concerns
after the Digital merger was announced--one reason the stock was
knocked down 5% that day--they are nearly unanimous in their positive
long-term outlook for Compaq. Kumar, for one, thinks Compaq will
rise 50% from $30 to $45 within a year.
Texas Instruments is our second pick. Why would we chose TI over
lead chipmaker Intel? That's a good question (especially considering
we're recommending Intel for retirement-oriented investors in the
cover package that begins on page 78). Truth is, it was a difficult
call. Intel is the dominant player and one of the pillars of the
technology sector, with an 85% share of the $20 billion market for PC
microprocessors. The share price is also quite reasonable, at 20%
below its high of last August. But Texas Instruments may be an even
more timely investment, particularly for investors with a shorter,
two- to three-year time frame. The reason: its market-leading
position in the fast-growing market for digital signal processing
(DSP) chips, which process audio and video signals for digital
phones, televisions and network communications. That market is
expanding 30% a year--compared with 19% for semiconductors
overall--and accounts for 34% of TI's semiconductor revenues.
Admittedly, TI gets nearly 20% of its revenues--or $1.6
billion--from the highly cyclical market for memory chips (DRAM).
Reduced Asian demand for DRAMs has struck fear in many investors, and
the stock has been knocked down 25% to $53.25 since last fall.
Nevertheless, TI is projected to post earnings growth of 24% this
year and 31% in 1999, according to First Call, a Boston firm that
tracks analysts' estimates (compared with 2% and 16%, respectively,
for Intel).
Analyst Dan Niles of BancAmerica Robertson Stephens in San
Francisco contends that TI's share of the DSP market, now 45%, can
top 60% over the next 10 years, even as the market grows from $5
billion today to a projected $50 billion. "TI is one of the few
companies besides Intel that could achieve market dominance in
semiconductors," he says. Analyst David Powers of Edward Jones in
St. Louis agrees, and considers the stock's current weakness to be an
attractive opportunity. Over the next year, he says, as investors
recognize TI's position in DSP, the stock could hit $65, more than
22% above its current share price.
Cisco Systems, which has more than seven times the revenue of its
largest competitor, is our third recommendation. Cisco controls 46%
of the booming market for network equipment that connects and manages
communications for businesses and the Internet. Because of its broad
product line, "Cisco is increasingly becoming corporate customers'
net-working supplier of choice," says BancAmerica Robertson Stephens
analyst Paul Johnson.
The stock might appear expensive at $63.75 a share, which
translates to a P/E of nearly 37. But given that Cisco has 30%
projected earnings growth and has recently joined the ranks of
Microsoft and Intel as a superstar stock, it's certainly justified.
"That's what you pay for a market leader that consistently delivers,"
says analyst Michael Gordon of BT Alex. Brown in Baltimore. He
thinks the stock will climb to $76 over the next year, which would
mean a 19% gain. [Korn: ASND is just listed below]
Applied Materials, our fourth pick, is the lone giant among
semiconductor capital equipment makers, which build the machines that
make computer chips. With $5.5 billion in revenues--more than triple
those of its closest competitor--Applied Materials is in every major
part of the business, from machines that coat silicon wafers with
conductive material to those that bombard chips with ions to change
their electrical properties and the highest-end models that produce
ultrathin circuit lines.
Because Applied Materials gets 50% of its sales from Asia,
investors have knocked the stock down 41% from its high of last
August. Again, a great opportunity. Chipmakers--even cash-strapped
Asian ones--can't survive long without the latest equipment. The
business is just too competitive. "If you were an Asian
semiconductor supplier, the last thing you would do is skimp on
capital spending--they have to invest in equipment," asserts analyst
David Wu at ABN-AMRO. Wu adds that the company is continuing to gain
market share. "Once people quit bellyaching about Asia," he says,
the stock could rebound to $50 within a year--a 57% gain.
GO SMALL AND GO FOR GROWTH
Now comes the fun part. Once you've got your mutual fund and
mainline stocks, you can look for small firms growing 30% a year or
more. When we sifted through dozens of small companies, we made a
surprising discovery: The best plays right now aren't necessarily the
companies that are struggling to capture a new market. (Veteran Web
surfers may notice that Yahoo! and Netscape aren't being lauded:
Yahoo! lost $23 million in 1997 and Netscape, $116 million.) Instead,
the firms that are profiting most are the tech-support businesses.
Think of it this way: When the California Gold Rush was going on,
would you have wanted to be out there hoping to strike the mother
lode--or selling pans and shovels to droves of eager prospectors? We
say go for the shovel merchants.
Network Associates, the first small stock we'd favor right now,
provides network security and management software. The company is
projected to show solid earnings growth of 39% this year,
accelerating to as much as 58% annually within the next five years.
It may not sound like an Internet play, but think again. "The
Internet has become the primordial soup for computer viruses," says
Merrill Lynch analyst Bruce Smith. One contaminated e-mail, and an
entire office network could go down.
The company's main selling point: one-stop shopping. If you want
virus protection, network management or encryption, you can buy them
all from Network Associates, which is expected to book sales of $805
million this year. "[The company] not only integrates fragmented
products but also simplifies the purchase decision," says BT Alex.
Brown analyst Mary McCaffrey. Despite these compelling prospects, at
a recent price of $54.25, the stock is off 31% from its high last
July. McCaffrey thinks that it deserves a P/E multiple of at least
30, instead of its current 22. That would put the stock at $73, or
35% above its current price.
Cambridge Technology Partners, our second small tech
recommendation, sells people--computer analysts, to be precise. This
$521 million information consulting and software development company
helps overworked corporate technology departments by providing
consultants and project employees. With demand for programmers to
implement network and Internet software far outstripping supply,
"Cambridge has the luxury of not having to worry about finding demand
for their services," says analyst Hugh Shytle at Cowen & Co. in
Boston.
In fact, the only thing limiting the company's growth is an
industrywide shortage of qualified personnel. Recruiting, then, is
the key to success--and Cambridge has a leg up on its competitors.
"They've got a great culture. These guys are the Tiffany of the
computer-consulting business," says Mark D'Annolfo, an analyst at
Adams Harkness & Hill in Boston. Though at $43.50 the stock carries
a P/E of 46, Shytle thinks that's justified by its 49% earnings
growth this year. He sees the stock rising to $56 in 12 months. As
any Cambridge programmer could tell you, that's a 29% gain.
Reporter associate: Vanessa Richardson
[SIDEBAR]
WHAT IS TECHNOLOGY, ANYWAY?
Technology accounted for about 15% of the U.S. economy--$1.2
trillion--last year and is growing 20% a year. Here's a look at six
major tech sectors, in terms of worldwide 1997 revenue.
Personal computers Desktop and laptop machines costing $500 to
$5,000 that operate individually or as part of a network Annual
market size: $240 billion Growth rate: 17% Leading firms: IBM,
Compaq, Hewlett-Packard, Dell
Semiconductors The silicon chips at the heart of stereos, cellular
phones and personal computers Annual market size: $150 billion
Growth rate: 18% Leading firms: Intel, Texas Instruments, Micron
Technology, National Semiconductor, Advanced Micro Devices, LSI
Logic
Software The code that runs computers, allowing them to process
information and communicate with one another Annual market size: $130
billion Growth rate: 20% Leading firms: Microsoft, Oracle, Computer
Sciences, Computer Associates, Novell, Abode Systems, IBM
Networking The specialized hardware and software that tie PCs
together Annual market size: $16 billion Growth rate: 30% Leading
firms: Cisco, 3Com, Bay Networks, Cabletron Systems, Newbridge
Networks, Ascend Communications
Semiconductor capital equipment The sophisticated machines,
costing as much as $4 million apiece, that make and test
semiconductors Annual market size: $25 billion Growth rate: 15%-plus
Leading firms: Applied Materials, Teradyne, Lam Research, Novellus
Systems
Telecommunications The builders and servicers of worldwide
networks for home, business and cellular telephones Annual market
size: $900 billion in services, plus $230 billion in equipment
Growth rate: 10% to 20% Leading firms: AT&T, Motorola, Bell Atlantic,
Lucent, Nokia
Note: Growth rates are projected average annual sales growth over
the next seven to 10 years. Sources: Every Investor's Guide to
High-Tech Stocks and Mutual Funds, industry analysts
[BOX]
SIX HIGH-TECH BARGAINS
These stocks have all been hurt in recent months but should come
back strongly, thanks in part to earnings growth rates of at
least 20% annually.
ANALYSTS' ANALYSTS'
COMPANY NAME , P/E GROWTH PRICE
(TICKER SYMBOL) PRICE RATIO PROJECTION TARGET
Compaq (Cpq) $30.00 17.8 20% $45
COMMENTS
The world's best-positioned computermaker
Texas Instruments (Txn) 53.25 21.1 20 65
[COMMENTS]
Controls 45% of the hot DSP chip market
Cisco (CSCO) 63.75 36.6 30 76
[COMMENTS]
Almost as dominant as Intel or Microsoft
Applied Materials (AMAT) 31.75 16.2 25 50
[COMMENTS]
Makes the machines chipmakers have to buy
Network Associates (NETA) 54.25 22.2 58 73
[COMMENTS]
Fast, fast, fast relief from Internet viruses
Cambridge Technology (CATP) 43.50 46.3 40 56
[COMMENTS]
Provides the tech talent in highest demand
Notes: Prices are as of Jan. 29, 1998. P/E ratios are based on
estimated 1998 earnings per share. Consensus earnings growth
projections from First Call are for the next five years.
Industry analysts' price targets are for the next 12 months.
Sources: Baseline, analysts' estimates
MONEY Online
Live conference on Wednesday, Feb. 18, at 9 p.m. ET: Get advice
on how to find winning tech stocks from author Michael Murphy.
On CompuServe at GO MONEY 800-492-1849
TABULAR OR GRAPHIC MATERIAL SET FORTH IN THIS DOCUMENT IS NOT DISPLAYABLE
COLOR CHART LEADING THE WAY An investor who put $100 a month into tech stocks since 1990 would have $26,000 today, vs. less than $20,000 for the S&P 500. |
