Tech Gold Rush Began Long Before Net Craze
Are technology stocks, after a spectacular run-up in 1998, suddenly too hot to handle?
That’s a rational question for many sober investors today. Yet fear of some individual stocks’ heights always risks obscuring an industry’s long-term opportunity.
Should you invest in technology? The answer is that of course you should. Technology is not merely a sector but the essential core of the economy these days. And the industries of computers, communications and biotechnology have the greatest potential for growth of sales and earnings going forward.
Ah, but knowing what to invest in and how to judge the strong from the weak--that’s the challenge in technology, as in any field. So understanding is needed.
But first, some review. As most investors surely are aware, 1998 was the year of the Internet. Internet-related stocks such as bookseller Amazon.com, search and service provider Yahoo and online network America Online rose five- to twelvefold, from prices under $30 a share to hundreds of dollars.
Other companies connected to the Internet, such as Lycos, Infoseek, Excite and Cisco Systems, doubled or tripled in price. Older tech companies, such as Microsoft and Intel, also forged ahead.
Leading biotechnology companies were not left out of the action: Amgen and Chiron doubled.
Overall, no category of stock mutual funds performed better than the tech category, with a 53.4% average gain for the year, versus 13.7% for the average U.S. stock fund, says Morningstar Inc.
Yet for all that performance, 1998 only continued a very long trend: Throughout the 1990s, tech stocks have consistently beaten even the soaring returns of the Standard & Poor’s 500 index of America’s leading companies.
Since 1989, the 100-stock Pacific Exchange technology index has gained 86% more than the S&P.;
Why did that happen? And can technology stocks continue their advance as we head into 1999?
Tech stocks’ gains, of course, reflect that the U.S. and world economies are increasingly information-based. And that trend will not only continue but accelerate in the years ahead.
However, investors should understand that technology develops in waves, and individual companies boom, then often bust. Today’s Internet is not the first information breakthrough to have caused soaring stock prices. Taking just computers, as opposed to earlier developments of telephone, radio and television communication, IBM and five other companies were once speculative favorites as Yahoo and Amazon.com are today.
Apple developed the desktop PC in the 1970s and investors boosted its stock to $73 by 1991. Today the stock sells for not much more than half that price, although the company is finding renewed success with a new Macintosh.
The point is that companies rise and fall as technology moves forward like a current, changing industries and economies and creating wealth. And right now, experts agree that a historic wave of technological development is building.
The personal computer industry “has created more wealth than any legal activity in history,” said venture capitalist John Doerr.
“The Internet will create even more wealth than the PC,” says analyst Mary Meeker of the Morgan Stanley investment firm.
Internet usage by companies communicating with others and within their own organizations is growing exponentially. Business-to-business Net commerce will total $186 billion within two years, predicts the Progressive Policy Institute, a Washington think tank.
Consumer purchases on the Net will grow more slowly, totaling $20 billion within two years, says PPI, which has just published a report titled “The New Economy Index: Understanding America’s Economic Transformation.”
But it isn’t only companies and people who work in software and the Internet that make up investable technology today.
Computer-aided manufacturing, for example, is used in all major factories these days. Many farmers guide their tractors by global-positioning satellites.
Furthermore, the use of information devices and digital networks will only increase. “Emerging new technologies such as ‘smart cards,’ voice-based computing, video telephony,” advanced software and a far more accessible and capable Internet “are just beginning to arrive,” says PPI.
U.S. business is eager for such advances. U.S. companies plan to increase research and development spending in 1999 by 9.3%, to $157 billion, says a survey by the Battelle Memorial Institute. Much of that will be spending on technology in some form. Doubts about a single year’s economic outlook or Asian financial crises don’t deter such spending.
A major need today is for development of better “transport equipment,” as an Internet study by Prudential Securities calls it, to accommodate greater flow of communications. Thus, telephone equipment suppliers such as Lucent Technologies and Northern Telecom are hailed in the stock market along with the data-networking vendors such as Cisco, and Qwest Communications, a fast-growing Denver-based supplier of fiber-optic data networks.
Greater capacity to transmit images and information--wider bandwidth--will be a prime growth area for technology in the coming years. The stock of Irvine-based Broadcom is a highflier now because it enhances the bandwidth of ordinary telephone lines. Advanced semiconductors will be needed, such as those of tiny Rambus, to work with more powerful digital processors.
Industry takes up technological advances rapidly because there are tremendous cost savings. Direct commerce on the Internet can cut distribution costs by a third. And as use of each breakthrough spreads, tech companies making the breakthroughs grow very fast.
Rapid growth is the simple reason why tech stocks return more than blue chips over time, says Michael Gianturco, president of Princeton Portfolios, a New York investment firm, and author of “How to Buy Technology Stocks.”
Gianturco, who wrote the book in 1996, advised then that investors should not be afraid to pay a premium for technology stocks. Earnings are less important in the short term than growth in sales, which can indicate that a company is establishing a dominant position in a new technology, he wrote. That sums up many investors’ attitudes toward tech stocks today, even amid high valuations.
But investing for rapid growth is inherently risky because any slowdown in sales then can suggest that a company’s entire product line or approach could be wrong.
Thus, tech stock prices can fall 20% to 50% in minutes. For investors who can’t take that risk, another way to own tech stocks is via mutual funds, which offer the advantage of broad diversification.
There are other tips to keep in mind. When a technology field is exploding, as the Internet is today, “it usually means competition is exploding,” wrote Gianturco.
Meeker puts it simply: “There will be a few huge winners and hundreds of losers” on the Internet, just as there were in earlier phases of information technology’s long development.
Picking winning companies in technology is difficult, but identifying underlying trends is not. For the next decade, industry and consumers will demand fuller and more complete communications and greater ease of use in technological devices: Toasters you can talk to, or at least toasters with sensors attuned to individual taste, will be introduced--along with far more important products such as genetic nerve replacements to relieve paralysis, and noninvasive, long-distance blood analyzers.
Like a river, the current of technological development moves forward always. That’s why technology is so attractive to investors. There are risks, of course--because there are rewards.
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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
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Tech’s Long Ride
Technology stocks overall have far outperformed even the spectacular performance of the blue-chip Standard & Poor’s 500-stock index in the 1990s. Price appreciation of the Pacific Exchange’s index of 100 leading tech stocks versus the total return (appreciation plus dividend income) of the S&P; 500, from Dec. 31, 1989, through Dec. 31, 1998:
Tech index: Thursday: +632.9%
S&P; 500: Thursday: +339.5%
Source: Bloomberg News
Biggest Gainers Among Stock Funds Overall
Here are the equity mutual funds with the highest returns for 1998, along with returns for other periods and their category and “star” ratings from Morningstar. Rating descriptions can be found with the special tables beginning on C12. Funds that held the superstar technology and Internet stocks of the year had an easy time beating market averages this year. Technology funds dominate this list of the best-performing funds of 1998. (For a list of the funds that lost the most, see C10.)
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Obj Cat 3-yr Total % Return Fund Cat Rtg Star 4th Q 1998 3-yr Matthews Korea I PJ 1 1 102.0 96.2 -22.2 Fidelity Sel Computers ST 4 3 38.8 95.5 36.5 Rydex Inv OTC LG 5 5 35.5 86.5 48.1 Flag Inv A Communications SC 5 5 48.3 81.7 41.5 Pimco A Innovation ST 5 3 37.2 79.4 34.2 Janus Twenty LG 5 5 29.7 73.4 42.2 Fidelity Sel Devel Comm SC 2 2 48.3 67.0 26.4 Idex Growth A LG 3 3 27.9 64.0 30.9 Alliance Cap A Tech ST 3 2 38.9 62.0 26.5 United Science & Tech A ST 3 2 34.5 59.3 22.8 Reynolds Opportunity LG 2 3 32.6 59.1 27.7 Janus Mercury LG 2 3 30.0 58.4 27.8 Managers Cap Appreciation LG 2 3 31.3 57.3 26.3 Janus Olympus LG NA NA 32.7 57.0 34.3 WM Trust II A Growth MG 5 3 30.1 56.6 26.2 Montgomery Global Comm R SC 3 3 32.3 55.1 24.7 Morg Stan Dean Wit B Info SC 2 2 38.7 54.8 21.4 Reynolds Blue Chip Growth LG 5 5 31.4 54.1 37.5 Smith Barney A Telecom Inc SC 4 5 25.8 53.7 29.9 Robertson Stephens Inf Age A ST 2 1 41.9 52.2 27.0 Fidelity Sel Electronics ST 4 3 56.8 51.1 34.7 Legg Mason Value Nav LV 5 5 36.2 49.4 42.4 Alliance Cap A Premier Gr LB 4 5 31.1 49.3 35.0 J Hancock Global Tech A ST 3 1 43.0 49.2 21.4 Pin Oak Aggressive Stock MG 2 1 44.0 49.1 18.7 Idex Aggressive Growth A LG 2 2 29.0 48.9 24.8 Alliance Cap B Premier Gr LB 4 5 30.8 48.3 34.1 J Hancock Global Tech B ST 2 1 42.8 48.2 20.6 Legg Mason Value Prim LV 5 5 35.9 48.0 41.1 Spectra Fund LG 3 4 33.7 47.9 30.1 Putnam A Growth Opp LG 5 5 30.7 47.4 34.1 Accessor Growth LG 5 5 27.7 46.7 32.8 Fidelity Sel Retailing SS 5 5 34.8 45.8 35.7 MFS A Strategic Growth LG NA NA 28.3 45.2 45.8 Fidelity Sel Software & Comp ST 4 2 21.8 45.0 26.5 One Group Fid Large Co Growth LG 5 5 24.5 44.7 31.1 Waddell & Reed Growth MG 4 2 28.8 44.6 21.5 One Group A Large Co Growth LG 5 5 24.4 44.3 30.7 Phoenix A Strategic Theme LG 2 3 36.8 44.1 24.8 Alger B Growth LG 2 3 25.0 44.1 25.8
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Source: Morningstar Inc.
NA= Not applicable
