The tech-stock challenge

Legacy: Because of heavy news interest, much information and analysis exist for the investor.

Dollars & Sense

October 28, 2001|By Andrew Ratner | Andrew Ratner,SUN STAFF

What are the secrets for picking technology stocks?

Ask the authors of The Gorilla Game: An Investor's Guide to Picking Winners in High Technology, one of many references on the topic, who freely admit:

"If ... we could predict the winners from the outset ... instead of writing this book, the three of us might be sipping Chateau Margaux atop a penthouse on the Via Tornabuoni in Florence, contemplating which continent we should cruise to next."

Obviously, there are no guarantees or easy answers when it comes to separating the wheat from the chaff in technology investments, one of the riskier areas in the stock market.

That's better understood now than a few years ago when it seemed that any day-trader could point-and-click his way to a million bucks. The sector's considered even more fragile since the terrorist attacks of Sept. 11.

Today, even well-regarded technology companies once assumed as sure bets have plunged, from Cisco Systems Inc. of San Jose, Calif., the largest maker of computer networking equipment, to Lucent Technologies Inc. of Murray Hill, N.J., one of the most widely held stocks in America.

But the engrossing rise and fall of the high-tech stocks did provide one positive legacy for technology investors. More media are following the field, from Web sites to traditional news outlets. Investors may have to sift through the clutter, but reams of information and analysis are available at little cost.

Moreover, people are attuned to the fact that technological advances are still coming. Technology industries are expected to account for nearly 30 percent of the U.S. economy next year, double the proportion of just four years ago.

Which technologies industries will thrive is the question. The market for electronic security and mobile communications is expected to grow because of fears raised by the attacks on the World Trace Center and the Pentagon.

"Although there was a real downturn, people are still interested, but they're going to kick the tires more. You've got to kick the tires," said Edward Trapunski, a free-lance journalist in Toronto and author of Secrets of Investing in Technology Stocks.

There are guideposts that he and other professionals use to evaluate such stocks.

"I think the important thing for all investors to remember is that technology stocks at the end of the day are no different than any other stock. Future earnings are going to determine the value of the company," said Kevin Prigel, who launched a technology investment Web site as a Texas college student and sold it last year.

Assessing growth prospects for traditional businesses is more straightforward, said Prigel, now chief technology visionary for IDEAglobal, the financial analysis firm.

Thomas W. Watts, an analyst with Merrill Lynch Global Securities in New York, begins his evaluation by looking at three variables.

One is financing, because a company is going to have difficulty gaining additional capital today. Second is the size of the market for a company's services - how much may it charge and how many customers does it have. And third is the strength of the competition, he said.

"Companies that are dependent on corporate information-technology budgets are having problems, but some areas are bright, such as data storage and security, where companies are going to have to continue substantial spending," Watts said.

Investing in technology may be a sophisticated discipline, but old proverbs frequently provide guidance. One often heard: Don't put all your eggs in one basket.

"Diversity is your best friend," said Douglas M. Schmidt, a partner in Grotech Capital Group, a venture capital firm in Timonium, and chairman of the Greater Baltimore Technology Council, which promotes technology business in the region. Invest in different types and sizes of companies, he said.

"If you invest in a major name like Hewlett-Packard, Microsoft or Sun, theoretically you won't get as large a gain, but you will mitigate risk," said Schmidt, formerly in charge of the information technology group at Legg Mason Inc. in Baltimore. "The best example of this was IBM. People have been ready to bury IBM several times over the last 20 years ... but IBM has marched along because it's hard to kill a good brand name. They've been able to take some tough hits over the years and bounce back."

Geoffrey A. Moore, co-author of The Gorilla Game, agreed. In technology, the sector leaders - or "gorillas" - are better investments, even though their stock price is typically the highest, because others often have to adhere to their systems, he said.

"The market leader in technology is worth the premium you pay for the stock," Moore said. "Pick the leader and keep it. Sell off the others."

He believes the battered sector is a good investment but only for the long-term, at least five years.

Michael Murphy, a California financial adviser who wrote a series of high-tech investing manuals for the publisher Dorling Kindersley, offers a system called the Growth Flow Model.

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