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High-Tech Stocks: A Thrill a Minute

OK, investing in high technology stocks isn’t much fun anymore. But leaving the game now would be like leaving the casino just after they reset the slot machines. You don’t know if your chances are any better, but it seems silly not to stick around and find out. Somebody’s going to win.

That sort of sums up the mood here this week at the 18th annual Hambrecht & Quist high-tech stock conference. About 500 money managers have come to listen to 140 high-tech companies pitch themselves as investments. Most are public companies; some are private firms. They all have the same basic message: My business is going to boom in the ‘90s, and you should be aboard.

Tandem Computers is here and very convincingly explains why telephone companies will use Tandem’s fail-safe computers to manage all sorts of new home and business phone services in the ‘90s. Intel, the computer chip giant, shows how its streamlining produced $140,000 in revenue per employee last year versus just $60,000 in 1984. Datalogix makes the case that its software programs are just the ticket to manage increased factory automation in such untapped markets as food and chemical production.

These are messages that professional investors here have learned to take with a Grand Canyon full of salt. It’s been that way ever since the tech stock boom and bust of 1982-83, when investors wildly bid up prices of any stock whose name ended in -onics, -ix or -data, only to see them crash when computer demand suddenly slowed. Tech investing has become Wall Street’s version of “Nightmare on Elm Street.”

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Year after year, the sequels have continued: Earnings are going great, then they collapse; a company is the industry leader one year, in bankruptcy the next; a hot new product becomes an also-ran six months later.

The net result is that long-term investors haven’t made much money in tech stocks as a group since 1983, as the accompanying chart shows. And this year has been extraordinarily tortuous. In the first quarter, many tech stocks soared as money managers became believers again, betting that it was time to give the group another chance. Then came April, and a host of tech companies announced that they wouldn’t meet earnings expectations for the first quarter.

Scott Bedford, managing parter at Peninsula Capital Management here, says many of his peers are shellshocked again. “The typical money manager is very, very leery,” he said, surveying the crowd at the Westin St. Francis Hotel.

Others use stronger words. “I hear a lot of investors saying they just can’t tolerate the magnitude of the surprises in technology anymore,” said Jim Cottle, money manager at Seibel Capital Management. “They say, ‘Technology is a small percentage of my portfolio, but it’s a major share of the headaches.’ ”

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Then why do so many big investors bother to show up here, year after year? Like they say in the casino--somebody’s always going to win. True, you lost your shirt in Digital Equipment Corp. stock in recent years. But earlier this year, stock of desktop publishing software maker Adobe Systems doubled to $40 a share from $20.

It’s fair to say that big investors love the tech group for the same reason that they hate it: When things happen, they happen fast.

And therein lies a key message for individual investors in this arena. There’s no question that many tech companies will be big successes in the ‘90s. To think otherwise is to believe that no one will make money from the astounding number of computer applications that are on the horizon.

But the speed-of-light product cycles in this business mean you simply can’t bet on most tech companies for the very long term. “I’ve always thought of tech stocks more as trading vehicles than investment vehicles,” said Peninsula’s Bedford. “I just can’t make the case to own them for 10 years.”

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At the same time, individual investors have an advantage over institutions in that individuals don’t have to panic and exit a stock just because the company stumbles for a quarter--which happens even to the best-managed tech companies. Money managers have to worry about clients’ paranoid reactions each quarter to the stocks that dived. Individuals can look at the stocks more rationally.

What’s a good time period for a tech stock payoff in the ‘90s? “I would much prefer to own a company for two years than two months,” said Barry Douglas, a pension manager for Hughes Aircraft. Big investors typically look for companies whose products are gaining momentum and can be expected to show healthy sales for at least two years. A basic rule: Pick the industry leaders that have a lot of new products in the pipeline because these companies are often in the best shape to stay in the forefront of their business.

An example, Bedford said, is Sun Microsystems, the computer workstation maker. “I think you’re just starting to see Sun turn now,” he said. “It’s very clear that what’s going on is that Sun is taking market share from DEC. Sun is at the beginning of its product cycle.”

Another example: Cadence Design, which writes software for the companies that build computer integrated circuits. As the cost of hardware has come down, computer companies can afford more workstations for their engineers. The goal is to produce more powerful circuits and get them to the market faster--and that’s where Cadence’s software helps the engineers.

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Companies such as Apple, Unisys and Samsung already are Cadence customers. But President Joseph Costello told money mangers that the market is far from saturated. “Even our largest customer has fewer than 30% of its engineers using the product,” he said.

Costello thinks his company, which earned 93 cents a share last year, is capable of 30% annual growth. The stock now trades around $22 a share. If Costello meets his goals, this stock will be a lot higher than $22 two years from now.

Sun and Cadence are two of many companies that are leading technological innovation--a new wave that will put awesome computer power in the hands of many more individuals in the ‘90s. Many experts at this conference feel that the implications of that wave have yet to be appreciated by investors. But it will come, they say.

And what if a tech stock like Sun or Cadence suddenly jumps 50% from where you bought it? You sell some. Keith Stout, who manages the West Midlands pension fund in Wolverhampton, England, advises letting fear rule greed whenever you’ve made good money in a tech stock. “I can live with making 50% on an investment and missing a doubling, if it happens,” he said.

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Common sense, Stout says, can bridge a lot of the pitfalls inherent in playing tech stocks--not the least of which is that the businesses are too complex for all but rocket-scientist money managers to grasp fully. “I readily admit that I don’t understand the depths of the technologies” these companies work in, Stout said. “But that doesn’t prevent you from being a good investor in them.”

TECH STOCKS: A STALLED BUS

High-tech stocks, on average, have failed to recover the highs they made in 1983, even while the broad market has advanced. How Hambrecht & Quist’s tech and growth stock indexes have performed versus the S&P; 500 (the growth index is a subset of the smallest companies in H&Q;'s tech universe.)


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