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For Tech Stocks, Info-Highway Saga Warns of Potholes

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Take a historical stroll through stories about investment manias and you find that they are fairly generic in substance. The wild action in the prices of the subject securities often unfolds much the same each time. Only the names change from mania to mania.

Remember the “information highway” stock craze? Two years ago, long before semiconductor stocks were the must-own shares for any respectable portfolio, the equities everyone wanted were those tied in some way to the info highway--that seemingly gold-paved electronic roadway that would off-ramp into your home via your phone, TV and-or computer, delivering an amazing array of services and entertainment.

Wall Street promised that the info highway would be a road to riches for phone companies, cable TV firms, Hollywood studios and all sorts of related producers of hardware and software. The story was simple, global and really hard to argue with. The stocks rocketed accordingly.

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So where are they now? Well under their peak mania-driven prices of 1993, in many cases--despite this year’s roaring bull market.

Cable giant Tele-Communications, for example, closed at $24.875 on Tuesday, or 25% below its 1993 peak of $33.25. Turner Broadcasting Class B shares are 29% below their ’93 peak; AT&T; is down 19% from its ’93 high, Time Warner 10%.

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To be sure, some of the stocks that soared in that ’93 info-highway mania have continued to rocket. America Online is up 199% from its ’93 high; Capital Cities/ABC is up 52%.

But of 20 randomly selected big-name stocks from that era, we found only five had risen more from their ’93 peaks than the 19% gain in the Standard & Poor’s 500 index from its ’93 high.

The disappointing performance of the info-highway stocks over the past two years is naturally reflected in the results of the handful of mutual funds that target those stocks. After huge gains in 1993, some of the funds slumped badly in 1994. And this year, most are lagging the 20% rise in the average general U.S. stock fund.

Having had plenty of time to think about it, Wall Street today has no shortage of explanations for what went wrong with the info highway stocks. No. 1 on the blame list is Congress’ decision to re-regulate cable TV rates last year, a move that helped kill the Bell Atlantic/Tele-Communications merger--the announcement of which in the fall of 1993 marked the zenith of the media stock mania.

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“All other things being equal, the cable act slowed down the process” of building the info highway, argues Morris Mark, a New York-based institutional investor who has substantial stakes in numerous info-highway companies.

Yet it’s also true that many phone and cable firms have found the technological development of--and demand for--on-demand electronic services to be slower-going than expected. (Surprise!) Which means, in retrospect, that some people simply overpaid for the stocks in 1993.

So the shares of many of the info-highway darlings of ’93 have spent the last two years marking time. Or, as Bruce Behrens, co-manager of the Flag Investors Telephone Income mutual fund in Baltimore puts it, the companies “have had to earn into investors’ expectations.”

Likewise, at some point the current technology stock craze also will peak, and investors will later realize that the prices paid for many issues were outlandish relative to the companies’ true growth trends. That peak may not yet have arrived, but as the stocks surge, investors should understand that the risk rises exponentially.

When the tech bubble finally bursts, Wall Street can only hope that the letdown is as relatively gentle as that which characterized the info highway stocks’ fall from grace. Because most of those companies had (and still have) viable businesses, few investors have lost their shirts even if they paid peak ’93 prices.

And some pros argue that the info highway stocks may be ready to rev again. With Congress set to deregulate telecommunications altogether, investors’ profit expectations for the companies may begin to rise. Consolidation in the business is still ongoing (witness Tuesday’s deal between Viacom and Tele-Communications) making the big players even more formidable in the long run.

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Stephen DuFour, manager of the Fidelity Select Multimedia fund, believes that the info highway hardware producers have had their day; he now has skewed his fund in favor of the cable firms and content providers (such as the studios) whose stocks have mostly been treading water since ’93.

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Revisiting a Mania

Performance of stock mutual funds that invest in companies tied in some way to the “information highway”:

Total investment return: Fund 1993 1994 1995 Seligman Commun. A +35.1% +35.3% +62.1% Fidel. Sel. Dev. Comm. +31.8% +15.1% +29.2% Fidel. Sel. Multimedia +38.0% +4.0% +25.1% Fidel. Sel. Telecomm +29.7% +4.3% +22.0% Flag Inv. Telephone +18.2% -6.6% +19.4% Montgom. Glo. Comm. +34.8% -13.4% +15.4% Invesco Leisure +35.7% -5.0% +15.2% Gabelli Value +39.5% nil +14.3% S. Barney Tele. Gro. +35.3% -6.4% +11.6% GT Global Telecomm A +47.7% -4.4% +10.5% Avg. general stock fund +12.5% -1.7% +22.3%

1995 data through Monday.

Source: Lipper Analytical Services

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