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03/24/98
Weekday Trader
Manna Amid the Mania
Lisa R. Goldbaum
These days it seems as if nothing short of an act of God -- or perhaps a
meteor making a direct hit on downtown Palo Alto -- could diminish Wall
Street's appetite for technology stocks.
Neither the financial crisis in Asia (which, by the way, hasn't
disappeared) nor ominous profit warnings earlier this month from the likes
of Compaq Computer, Motorola and Intel have been able to cool investors'
enthusiasm. Indeed, the tech-heavy Nasdaq Composite Index has risen more
than 14% so far this year, surpassing even the strong Dow Jones Industrial
Average, which has gained about 11%.
And the euphoria appears to be ubiquitous: Online powerhouse America Online
and PC-maker Dell Computer have both soared at least 50% so far this year,
while software titan Microsoft has surged about 30% and leading
networking-equipment maker Cisco Systems has gained about 22%. One of the
very best performers has been communications-equipment manufacturer Lucent
Technologies, which was spun off by AT&T: It has risen a whopping 54% in 1988.
Obviously, this kind of exuberance raises yellow flags for investors who
care at all about valuation. But paradoxically, technology stocks that
trade at discounts to their peers often do so because of real problems at
those companies. A good example: the disk-drive makers, whose stocks have
been in the gutter throughout the tech rally because of price wars and,
therefore, unpredictable earnings.
That's why several portfolio strategists and analysts with whom Barron's
Online spoke say the best way to invest in technology in this current bull
market is to look for companies that have the most stable earnings
prospects, rather than the lowest price tags. Pros like John MacNeil, a
Smith Barney strategist, likes companies that use technology better than
those that create it, since those companies have better earnings visibility
and more stable outlooks. MacNeil likes Automatic Data Processing and
PayChex, the leading payroll services providers. But these stocks aren't
cheap: ADP and PayChex trade at almost twice their expected 1999 earnings
growth rates.
The best value of the bunch may be First Data Corp., which provides billing
services for banks that issue MasterCard and Visa credit cards as well as
investment processing services for mutual funds. First Data's
price-to-earnings multiple of 18 times First Call's 1999 consensus earnings
estimate of $1.88 a share is at just a slight premium to its expected 1999
growth rate of 15% -- and in line with its projected five-year earnings
growth rate.
Another tech strategist, James Townsend of Soundview Financial, agrees that
given the steep valuations in the technology sector, it's better to stick
with companies in high-growth areas with more predictable earnings. He
argues that while the enterprise software sector is currently very pricey,
Computer Associates may have more upside -- noting that the stock fell
throughout the company's failed merger bid for Computer Sciences. Investors
must have agreed, as CA's stock was up 1 13/16 in Tuesday's trading
session. Nevertheless, Townsend points out that CA -- a proven long-term
grower -- is still trading below its 52-week high of 58 5/8.
Another technology group that still looks promising is telecommunications
equipment, which despite a big run-up seems to be trading at reasonable
valuations. Townsend likes ADC Telecommunications, which makes hardware and
software that speed transmissions of voice, data and video. ADC seems like
a bargain compared with other technology names. At about 18 times First
Call's consensus estimate of $1.36 per share for the fiscal year ending
October 1999, the stock is trading at a pretty steep discount to its
expected growth rate for that year of 28% -- as well as to its projected
median five-year growth rate of 25%. PairGain, which makes products that
allow copper telephone lines to transmit high-speed digital data, also is
trading at a discount to both its 1999 and five-year growth rates.
And even some high-flying Internet stocks may still have room to run. CIBC
Oppenheimer analyst Henry Blodget believes that second-tier Internet search
engines like Infoseek and Lycos, which both have racked up big gains, have
more potential upside than the likes of AOL and Yahoo! "People are assuming
that the Internet business is 'winner take all,' but it's really 'winner
take most,'" he contends, explaining that "you want to buy a company that's
going to be around for a while" and will still have market share, even if
it doesn't have the most market share.
One temptation to avoid in this environment: bottom-fishing. Strategist
MacNeil believes it's dangerous to buy into depressed stocks like
disk-drive maker Quantum -- which announced Monday that its fourth-quarter
earnings would be lower than expected -- on the assumption that things
can't get much worse. Still, a rising tide lifts even leaky boats, and
investors shrugged off the news: Quantum was up by as much 1 1/2 Tuesday
before closing at 21 1/8, up 5/8.
You just can't keep a good mania down.
WEEKDAY TRADER ON CNBC. Every Monday through Thursday evening, CNBC's
Business Center with Maria Bartiromo and Tyler Mathisen features a report
based on that day's Weekday Trader column from Barron's Online. And on
Friday, Business Center presents an extended preview of the next issue of
Barron's. Business Center airs from 7:00PM to 7:30 PM Eastern time, with a
repeat broadcast at 2:00 AM Eastern. Consult your local listings and tune
in--or program your VCR!
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