Stock Pickers Climb on Technology’s Broad Back
You might never know it from the stock market’s gyrations, but big money managers have turned decidedly bullish.
And the focus of their optimism is the field broadly known as technology. A poll in Barron’s last week of 176 major pension fund managers said they see stock market averages scaling new heights next year. Their favorite stocks are Microsoft, Motorola, Intel and Cisco Systems, a small but rapidly growing San Jose company that has caught the fickle attentions of analysts and big investors.
More than routine stock picking is at work. Technology is the engine of the U.S. economy and, increasingly, the world economy too. Therefore, optimism on technology indicates long-term bullishness on most industries, especially U.S. businesses. “A decade ago there were doubts, but now it’s clear that U.S. companies dominate in technology, whether in computers, semiconductors, software or data networking,” says Harry Lange, manager of Fidelity Investments’ Select Technology fund and its Computer and Electronics funds.
That U.S. lead was achieved not by one company or a few, but by headlong competition that spawned thousands of companies now employing 2.4 million people in the United States alone. Technology is moving to be the world’s largest employer as it grows to be the world’s largest industry--total sales will reach $800 billion this year.
What that means is: If you want to know about good jobs and changing work patterns, you have to watch technology companies, because they set the tone today. And if you want gains in your investment accounts, you should have some of your money--20%, say experts--in technology stocks.
It’s no picnic. After a 29.7% rise last year, Lange’s Technology fund has an 18% gain so far this year--although in the first six months it had no gain at all.
Volatility can be frightening. Early this year, some analysts thought Cisco Systems’ growth was slowing in the business of developing tools that allow computers to share information easily. Its stock fell from more than $40 a share to less than $20 between March and July, even as its business continued to grow at a rate of 50% a year. Cisco stock has since recovered more than half its loss, but investors who bought at $40 are still nursing wounds.
And so are employees, because at Cisco--as at most technology companies--the pay may be good, but the real attraction is stock ownership, with stock grants and options common among all ranks, from receptionists to executives.
At SynOptics Communications, for example, more than half the 1,700 employees are in the stock options program--and many, therefore, are holding losses at the moment. In six years, SynOptics, of Santa Clara, Calif., grew from zero to $700 million in sales in the same business as Cisco. But then its growth stalled, due to fierce competition and customer confusion about the new technology.
SynOptics stock, which had risen from $3 a share to $42 by mid-1993, fell all the way to $16 last month when the company merged with Wellfleet Communications to form Bay Networks. The new firm has a more rounded line of networking tools; its stock currently sells on Nasdaq for $27 a share.
Such volatility makes the newest, fastest-growing industries seem no place for ordinary investors or employees.
Yet over five years--a good, conservative investment horizon, notes Fidelity’s Lange--the highest returns are made in technology funds.
Technology stocks consistently rack up double the returns of the Standard & Poor’s 500 index and other stock averages, says Michael Gianturco, whose firm, Princeton Portfolios, manages money for institutional investors.
“Yes, the risk is fundamental,” says Gianturco, who has a book coming out next year titled “The Market That Beats The Market.” “Companies fade; competition arises quickly and is very intense,” he says.
There are 350 software companies now, in a field where only a handful of names--such as Microsoft, Lotus, Borland, Novell and Oracle--are recognizable. Investors have to search out small companies with specialty products, or have a mutual fund manager do it for them.
But numerous companies and intense competition are signs of industrial strength, not weakness. “Many of these companies are growing 20% to 30% a year,” notes Richard Shaffer, publisher of Technologic Computer Letter. Technology mutual funds are up more than 10% this year, according to Lipper Analytical Services.
One reason there are so many companies is that the computer-electronics industry often separates functions such as manufacturing and design; firms specialize in making a single tool or part of the process, such as microchips or circuit boards or display screens.
Cost pressures constantly force change. Last week, for example, Silicon Systems decided to move semiconductor wafer manufacturing from Tustin to its plant in Santa Cruz, where it has more up-to-date equipment. That means 150 jobs, at $11 to $12 an hour, will be done up north. But 800 jobs in semiconductor design and development, as well as non-technical work, will stay at Tustin headquarters because of the proximity of skilled suppliers in Orange County and the availability of engineers--who fetch $35,000 a year to start these days.
For all the seeming chaos, technology can be a long-lived business. Silicon Systems, owned since 1989 by TDK Corp. of Japan, is 22 years old; major names such as Hewlett-Packard, Motorola and Intel--not to mention IBM--have been around for decades. What is changing most today is that computing and electronics are transforming all other businesses, from securities trading to movie distribution--and just beginning to do so in countries all over the globe.
That spells big opportunities for U.S. companies, old and new. “We’re booming,” says Michael Moritz, a partner in Sequoia Capital, the venture capital firm that backed Cisco Systems, among many others. “There’s plenty of venture money for start-up companies in data networking, semiconductors, client-server software and digital video,” he says.
But though it’s a faster world, it hasn’t changed that much for master investor James Stowers, the founder and chairman of Kansas City’s Twentieth Century Mutual Funds company, who has written a book titled “Yes You Can Achieve Financial Independence.”
As he has for 36 years, Stowers advises ordinary investors seeking to stay ahead of inflation to invest “in companies whose earnings and revenues are accelerating”--which just about defines the technology companies that have made the big money managers bullish.
