Digging Deeper to Find Buys in Tech Stocks
For technology investors, it feels as if the walls are closing in. The worsening conditions in Asia and the PC price war continue to jolt the industry, particularly semiconductor companies. Just Wednesday, chip-making equipment leader Applied Materials saw its shares drop 6% after the company announced it would cut 2,000 jobs.
One reaction has been a rush to giant companies that have shown superior execution in their businesses and have highly liquid stocks, making their shares easy to buy and sell in volume.
Wednesday exemplified the trend, as Dell Computer jumped $4.63 on epic volume to close at $128.56 while the tech-heavy Nasdaq composite index lost 1.67% of its value. The beneficiaries of this flight make up a very short list--Dell, Microsoft, Cisco Systems and a few others--but as their stocks climb, so do their risk.
“Buyers are getting more focused on the only things that seem to work,” said Scott Bleier, chief investment strategist for Prime Charter in New York. “But because people are capitulating and buying Dell, it doesn’t mean it’s a good investment. When you’re on a pedestal, it’s easy to get knocked down.”
In this environment, tech investors aren’t out of options, but they have to dig deeper than before to find growth, value and low risk.
Bleier’s favorite tech stock is AirTouch Communications, which, although not cheap at 64 times its last four quarters’ earnings, deserves a premium for its consistent profit growth, he says. He adds that Asia isn’t a problem for AirTouch, which does the bulk of its business in the U.S. and Europe.
Keith Mullins, small-stock analyst at Salomon Smith Barney, targets two niches for “better earnings at lower prices.”
Contract manufacturing firms such as Flextronics and Solectron build products for the likes of Cisco and Dell. “They benefit when these guys are doing well, but they are a boatload cheaper.”
Tech services companies, which install computer networks and implement Year 2000 solutions, are also positioned well, Mullins said. Among his favorites are Cambridge Technology Partners, Whittman Hart and Sapient. “Demand substantially exceeds supply for all these companies,” he said.
Analyst Greg Vogel covers Internet stocks for NationsBanc Montgomery Securities, and not all the companies on his beat trade at prices that assume a glorious future. Asia isn’t an issue because these young companies stick close to home.
Two companies he likes sell Web-related software. Open Text’s browser-based products allow collaboration on documents across an organization. Revenue doubled in fiscal 1998 to $45 million, and Vogel expects profit to jump to 68 cents a share in fiscal 1999 from 9 cents in ’98.
Many companies using their Web sites for publishing and marketing rely on Inso Corp. to make it work. Inso is a cash-rich company in transition--as its fast-growing Web business accounts for a greater portion of its revenue, Vogel expects earnings to accelerate and investors to notice.
“We are seeing major changes in corporations; they’re retooling their applications and software systems,” he said. But as investors plow into portals and E-tailers, “a number of these companies have been overlooked.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Tech Refuge
For tech investors concerned about exposure to Asia and rich valuations, analysts suggest looking at these companies:
*--*
Earnings Company Ticker Wed. close P/E* growth rate** Cambridge Tech. Partners CATP $41.00 54 47% Open Text OTEXF 14.13 N/A 45 AirTouch Communications ATI 64.00 64 33 Flextronics FLEXF 36.88 29 27 Inso INSO 21.25 22 18 Nasdaq 100 index 55 S&P; 500 index 26
*--*
*Price-to-earnings ratio based on previous four quarters.
**Analysts’ average estimate for each of next five years.
N/A: Not available
Source: Bloomberg News
