While it is going to be difficult to predict which technology stocks have a long-term future, fundamentals such as income streams are still the best guide-line when investing in the highly volatile sector.
While it is going to be difficult to predict which technology stocks have a long-term future, fundamentals such as income streams are still the best guide-line when investing in the highly volatile sector.
Macquarie Investment Management chief investment officer Greg Matthews says it is very hard to pick a technology stock that will give good returns over a 20-year period.
“If the stock is to achieve that goal it would have to stay right on top of its technological advantages in a very competitive market,” he says.
“The only time this can work is if a company is selling a product or service that has no competitors.”
Lazard Asset Management, in a report in the first quarter of this year on the ‘new economy’ says the key is finding technology stocks that relate to the old economy companies.
“The priority is finding companies that possess the continual innovation to stay on top. These will be able to play a long-term role in the transformation and the service of traditional companies,” the report says.
Companies that have met this criteria – Microsoft, Dell Computers and America Online – would seem to be set for a long growth pattern. However, Matthews says that looking back 30-odd years throws up some interesting aspects on longevity.
In 1968 major players in the US computing business were companies like Teledyne, Mohawk Data and Control Data. None have survived (see table).
The dramatic rise in those technology company prices, and the even more dramatic fall the following year, will happen again in the next few months, Matthew pre-dicts.
In the US, information technology shares grew by 100 per cent in 1999. The tele-coms sector grew by almost 50 per cent and the negatives were areas like healthcare and utilities.
In Australia, technology stocks grew by 90 per cent in 1999 and were followed by resources stocks which grew at just over 60 per cent.
However, many of these technology stocks are not generating the same growth in financial terms.
According to the Russell 2000 index, 92.9 per cent of companies in the index were losing money in 1999. In its Mid Cap index, 163 per cent were losing money. The S & P 500 Index has 43.9 per cent losing money.
The former chairman of the Federal Reserve, Paul Volker, said last year: “The fate of the world economy is now totally dependent on the US stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings.”
In Australia, a number of technology companies have already shown downward trends as earning potential or market dominance in their sectors evaporate.
E*Trade, squeezed in an electronic brokering price war, has seen its share price fall from a $10 high in April last year to about $3 last month. This represents a 70 per cent fall in the share price in a year.
Matthews says nobody can run a business losing money in a competitive market-place. “If these companies keep losing money, eventually somebody ends up hold-ing the baby,” he says.
Part of the rise in technology stocks can be put down to psychology.
“There are more buyers in the market than sellers and this leads to the price being pushed up as people chase rising stocks,” Matthews says.
This demand is being meet by many floats which are rescuing companies that have run out of money, he says. With many of the technology entrepreneurs’ share al-locations coming out of escrow, more shares will flood the market.
“For these investors, value doesn’t matter when the stocks are on the way up, and it won’t matter on the way down,” Matthews says.
People will continue buying technology stocks even when they are falling, in the belief they will go back up again.
This pattern of buying has occurred in previous stockmarket bubbles with the end result being lots of people ‘doing their dough’.
The key to investing in the technology sector is to create a portfolio of stocks with the understanding that 20 per cent will fail. “While there is a high rate of return for each stock, you know some will go bad,” says Matthews.
“The technology is changing fast, so by finding stocks at the right price and in a spread, the risk becomes more realistic although investing in the technology sectors still exposes the investor to massive risk,” he says.
“Also remember when stockmarket bubbles end, they tend to end badly for inves-tors.”
