A loser may come back, or it may sink out of sight

Technology: Whether to continue holding decimated stocks depends on research and your time frame.

Dollars & Sense

October 28, 2001|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

Financial consultants have three key pieces of advice for shareholders re-evaluating their technology stocks that were once gems of the market: Consider your time frame, take a second look at the company and think about buying stocks in other industries.

And though the market proved unstable in the wake of the Sept. 11 terrorist attacks, "this isn't the first time the market's seen volatility like this," said Patrick Buttarazzi, an associate vice president for Prudential Securities in Baltimore.

Richard Cripps, chief market strategist for Legg Mason Inc. in Baltimore, said investors tend to seek out the safest stocks after a defining crisis event. But don't get too adverse to risk, he warned.

"If anything, the risk-reward is better for the vast majority of stocks," Cripps said.

Many technology stocks that fell with the sector last year will take years - not months - to get back to their highs, said Joseph Cirelli, a financial consultant for Solomon Smith Barney in Baltimore.

Experts agree that deciding whether to sell or not may just depend on how long a stockholder is willing to wait.

"To determine whether to hold some of these stocks, you have to consider your time horizon," Cirelli said.

Also, investors need to reassess what they consider to be a quality stock and take another look at the company they've put their money into, Cirelli said. The business they bought into two years ago may not be the same company today.

Look for new ideas, Cirelli said. Don't obsess over Cisco Systems Inc. in the teens, for instance, simply because it once was at $80, he said.

"If Cisco went to $80 in the next 10 years, it would be an excellent investment," he said. "But people who owned Cisco two years ago wouldn't be happy with that."

Many investors are tantalized by how high the stock once was, Cripps said.

"They look at that as though the $1 is almost a lottery ticket to get back to 100 [dollars]," Cripps said. "That line of thinking is just wrong and it is one that is really outside of the decision-making that one should use to be a successful investor."

All technology stocks are different.

"You have to look at the company and you have to look at what the company does," Buttarazzi said. "And you have to ask yourselves, is there a future for what this company does?"

Also, look at the future of the sector and which is the best company within that sector.

Internet networking equipment-maker Cisco, for instance, used to own the space it was in, he said. But now, there are competitors. Even if there is a future in networking, that may not mean an investor should hold on to Cisco's stock, he said.

Also, many investors bought a stock on the momentum of what that stock did, Buttarazzi said. "Now you can't just look at momentum," he said. "You have to assess the stock for what it does and why is it getting higher."

As was the case with PSINet Inc. and some other Internet companies, Buttarazzi said, "if the business model doesn't exist, I think your hope of the stock coming back is limited."

There's a lesson to be learned, Cirelli said, from investing in companies such as PSINet, a young business with an unproven model: There are a lot of tech companies that are never making a comeback.

"With this mania over the Internet and everything tech-, net- and telecom-related, people were always looking for the next big winner and they went down the scale in quality," Cirelli said.

Still, anyone who invests in the market over a long time can have companies in his or her portfolio that go bankrupt, such as PSINet, Cripps said.

"The lesson is that you need to maintain or contain risk-type situations, such as PSINet, to a very limited part of your portfolio," he said.

Jim Kedersha, a communications technology analyst for Adams, Harkness & Hill in Boston, said the dilemma investors get caught in is what to do when a stock drops quickly. Many people, he said, are reluctant to get rid of a stock when it has gone way down.

"That's the age-old question: Do you double up or do you get out?" he said.

But Kedersha said it comes down to the fundamentals: Do you believe in what the company is doing, its strategy and the market it is in? "If you have confidence in the market and the company's position," he said, "you probably want to hang on."

Another point experts make in evaluating technology stocks is to look for ideas in other industries.

Just because technology stocks took the lead in recent years, Cirelli noted, it doesn't mean that the technology sector will be at the forefront on the other side of today's bear market.

"There's a whole slew of sectors that I think people overlooked in '98 and '99 and the first part of 2000," Buttarazzi added. Diversification, he said, means owning stock in other areas, such as energy, health care and the financial sector.

Investors should have no more than 15 percent of their portfolio in technology stocks, Cripps said.

Cripps said Legg Mason breaks technology stocks into two categories: "There is a difference between what we call busted-growth stocks and busted-bubble stocks."

Busted-growth stocks, he said, are ones where investors had very high expectations, but evidence emerges that earnings and sales will be less than anticipated, and the stock price plummets.

In these cases, the price-to-earnings ratio goes down with the valuation of the company and the stock price. These are the kind of stocks, Cripps said, that typically recover over time and investors are advised to hold onto.

Busted-bubble stocks, he said, are a phenomenon of the recent market.

In these cases, earnings and sales have declined faster than the stock price. The company's P-E ratio, though, remains high, which signals that investors still have very high expectations that are not going to be met. These stocks are riskier, he said, and should be sold.

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