Diversified Tech Portfolio Looks Good a Year Later
As brave investors continue to pile into the stock market--especially into technology issues--the less brave on the sidelines stand there with one of two points of view:
* The buyers are crazy or blind or both, because the market is going much lower shortly.
* It’s too late to buy, because even if stocks don’t plunge from here, they can’t go much higher.
Well, you heard many of the same arguments one year ago, particularly about the tech stocks. They were rallying strongly last winter, even as the broad market sank.
So, what if an investor in the winter, 1990, rally decided to make a long-term bet on a basket of tech stocks? How crazy would you have been to buy into that rally?
The accompanying chart gives one possible answer. The 10 stocks in the chart appeared in this column on Feb. 9, 1990. They are a mix of tech businesses, including computer hardware (AST Research, Tandem), peripheral equipment such as disk-drives (Conner, Maxtor) and software (Autodesk, Adobe, Consilium). It’s a randomly chosen portfolio of stocks that were hot early in 1990. Nothing more, nothing less.
One year later, five of the stocks are up and five are down. If you had invested $1,000 in each a year ago, your $10,000 portfolio would be worth $11,208 today. That’s a gain of 12.1%. If you include the dividends paid by Autodesk and Adobe, the return is 14.1%.
You can look at that hypothetical return in any number of ways, of course. It beat the S&P; 500 broad market index handily (the S&P; is up 0.5% in price, about 4% with dividends). But the return on a one-year bank CD in the same period would have been around 8%. For the risk you took, maybe 14.1% isn’t so great compared to a risk-free 8%.
What’s more, it’s likely that most investors would never have stuck with these stocks for one year. Many investors probably would have dumped Maxtor long before it hit its current price of $3.50. And many probably would have sold AST after it doubled, missing the rest of its climb.
But the point worth making here is that a long-term investor, buying a diversified portfolio of stocks in the middle of a major rally, looks darn good one year later--despite the stocks’ ups and downs in the interim. The companies that delivered strong earnings saw their stocks do very well. The earnings dogs were losers. Pretty cut and dried stuff.
What to do now? You’re hardly alone if you feel sick about missing a potential market bottom, yet also remain extremely nervous. The war, the recession, the credit crunch--all these and more threaten to make fools out of short-term traders in this market. “The market still has some potential,” says Ken Knutel, manager of the Kemper Technology stock fund in Chicago. “But the market also is making some very big assumptions” about how things will work out, he adds.
Even so, he sees long-term value in such names as Apple Computer ($52.125 Thursday) and IBM ($121), two of the leaders in the current rally. In the wake of the heavy selling of those and other stocks last autumn, “Institutions generally are way underweighted in the group,” Knutel says.
Barney Hallingby, research chief at tech-stock specialist Hambrecht & Quist in New York, believes the stock market’s powerful rally is a sign that investors are looking beyond whatever short-term pitfalls lie ahead for the economy. Whatever else may happen, he says, “the Federal Reserve continues to lower interest rates, and that’s going to put a floor under the economy.”
The time to buy tech stocks, in particular, Hallingby says, is when worried analysts are busy cutting earnings estimates--as they are now--while the stocks are rising. That sets the stage for positive earnings surprises in the quarters ahead and heavy new interest in the stocks, he says.
Hambrecht & Quist’s “selected-stock list” now includes biotech firms Amgen ($72.25) and Centocor ($51.75), personal computer maker Compaq ($61.50) and software firms Adobe and Consilium, among others. “We look very strongly for earnings momentum,” Hallingby says. “Right now, everybody’s still looking at what’s behind us, but the market is looking ahead.”
Playing it Smart: If this rally does indeed continue, the pressure is going to mount on big and small investors alike to put their cash to work. It’s a good time to invoke a common-sense approach to investing: averaging your purchases.
That is, if you’ve got money to invest, don’t put it all to work at once. Whether you’re buying an individual stock or a mutual fund, plan to buy in equal sums over a period of months. That way, if the bears are right and the market is on the brink of collapse, you’ll have insured that you didn’t use up all your powder at the peak.
If the bulls are right, and stocks continue to soar, you’ll be buying on the way up and won’t feel as if you’re missing out.
Averaging your purchases takes a lot of discipline, but it sure beats the mental anguish involved in trying to time the market.
IDB on the Rebound?IDB Communications, the Culver City-based company that has built a big business managing satellite data transmissions for governments and companies, apparently is picking up substantial new business because of the Persian Gulf war.
IDB President Edward Cheramy confirmed that the firm’s revenue in the fourth quarter ended Dec. 31 will be “up significantly” from the third quarter. The gain is “in no small part because of the Middle East, but there’s also an awful lot of additional broadcasting activity,” he said.
IDB provides the data link that is bringing much of the TV news from the Middle East. It also is handling transmissions for other news organizations, including the Los Angeles Times. And the company continues to be a major contractor with the U.S. government.
Earnings for the quarter ended Dec. 31 won’t be released until March 4, but Cheramy confirmed that results for the fourth quarter and for the current quarter will be “substantially” ahead of year-earlier levels. IDB posted a loss of 9 cents a share in the first nine months of 1990 as revenue growth slowed. Besides the turnaround in revenue, “Costs are being controlled,” Cheramy said.
The stock closed Thursday at $8.25 in the over-the-counter market. It traded as high as $12.50 and as low as $5 last year.
A TECH BASKET, ONE YEAR LATER In the midst of the winter, 1990, tech-stock rally, this list of 10 tech issues appeared in this column. Here’s where they stand one year later.
Feb. 8, 1990 Thurs. Pct. Stock close close chng. AST Research 14 1/2 40 3/8 +178.4% Conner Peripherals 15 1/4 24 1/4 +59.0% Adobe Systems 26 35 7/8 +38.0% Sun Microsystems 21 3/4 27 7/8 +28.2% Autodesk 44 52 +18.2% Consilium 17 1/4 16 1/4 -5.8% Seagate Technology 18 1/4 12 3/4 -30.1% Octel 25 7/8 14 7/8 -42.5% Tandem Computers 27 3/4 12 3/8 -55.4% Maxtor 10 5/8 3 1/2 -67.1% $1,000 in each $10,000 $10,853 +8.5% S&P; 500 332.96 334.78 +0.5%
