HIGH TECH, HOT TECH; PAYOFF POTENTIAL GREAT, BUT IT'S EASY TO GET BURNED.

Byline: Deborah Adamson Daily News Staff Writer

The numbers are staggering in their simplicity: Anyone who put $10,000 in Microsoft stock in 1986 would have $2 million now.

Bought $10,000 worth of Amazon.com a year ago? It's worth $84,300 now. Waited until Jan. 1 to buy America Online? Your $10,000 is now worth $31,271.

The fact of the matter is, technology stocks, especially Internet companies, are hot. Despite last week's sell-off, technology stocks remain the darlings of the investment world and as alluring to Wall Street as the apple was to Eve.

But the tech world can bite back.

Just last week, shareholders of MRV Communications saw their holdings fall 14.8 percent in Thursday's big sell-off and then 52.6 percent on Friday when the Chatsworth-based company announced quarterly earnings wouldn't be as strong as first believed. MRV makes telecommunications equipment.

And that's just one example. Shares of Shopping.com lost 67 percent of their value from Monday through Friday last week; shares of computer chip maker LSI Logic Corp. have lost 59 percent of their value in a year.

So how does one find the golden stock amid all the dross? Here's advice from mutual fund managers, analysts and professional investors who make a living trying to distinguish the real gold from fool's gold.

Tip No. 1: Look for a fast-growing market and pick out its leading companies.

The market's revenues should be growing in double-digits, and the higher the growth rate the better, said Peter Rogers, director of technology research at Volpe Brown Whelan & Co., a San Francisco investment banker.

One such market, he believes, is the communications sector, which includes the Internet, wireless and digital switching equipment areas.

Look for companies whose own growth rates are outpacing the market overall. That means they are grabbing market share, Rogers said.

When a company's product sets the standard for the industry, such that other products and services have to be compatible with it and it would cost a ton to switch to another system, you've got a possible winner, according to the book ``The Gorilla Game: An Investor's Guide to Picking Winners in High Technology.''

That's what Microsoft did. It set the standard for PC operating systems first with its MS-DOS and then Windows, defeating Apple and IBM's OS/2 system.

In communications equipment, Cisco, Lucent, 3Com and Ascend are the choices of Gerard Hallaren, co-manager of the $1.1 billion Invesco Strategic Technology Fund in Denver, whose 10-year average annual return is 21.78 percent.

In the software and data services market, he likes America Online and IBM.

Tip No. 2: Consider slower-growing industries, but pick out innovators.

Even in mature markets, investors can find a winning stock if the company has innovative new products or services.

For example, Rogers said the graphics software sector is a $3 billion market that is barely expanding. But an innovative company called Visio has grown an average of 70 percent a year since 1995, taking business away from competitors.

Tip No. 3: Determine whether the market's growth rate can continue.

Is the market's expansion a short-term deal - such as the Y2K service sector - or will it continue to grow? Is the rate of growth of new users increasing?

The market's potential must be broad-based, its growth expected to spin forward into the future. One such area is the Internet, as technologies, services and products continue to support and expand the market.

Tip No. 4: Once a promising company is identified, examine its product cycles.

The company must continue to introduce new, innovative products relatively quickly, Rogers said. Don't pick companies that depend on just one product without much in the way of innovation. That makes them vulnerable to rivals.

For Internet companies that don't have traditional products, an important yardstick is their ability to attract visitors, said Derek Brown, an Internet analyst at Volpe Brown Whelan.

``Top tier companies like Yahoo!, Excite and Lycos had enormous run-ups (in their stock prices) because they are the leading aggregators of consumers online,'' he said.

Investors should also look at the strength of the company brand and the value of its distribution partnerships, said Brown, citing Disney's investment in the search engine Infoseek and NBC's interest in Cnet, a network of news and technology Web sites.

However, not everyone agrees with this strategy.

The Internet, which is doubling traffic every 100 days, is still in its early stages and promising companies today might not be the leaders tomorrow since the landscape changes quickly, said Michael Murphy, author of ``Every Investor's Guide to High-Tech Stocks and Mutual Funds'' and editor of the California Technology Stock Letter in Half Moon Bay.

Everyone remembers successful companies like Cisco, but they forget about the scores of losers, he said.

``The turf is littered with them,'' Murphy said.

In the rapidly changing Internet sector, early winners may be pushed out. He cites First Virtual Holdings, whose online payment system generated initial excitement. But when the paradigm of paying over the Internet changed, the company lost favor. Its stock is now at $2 from an initial public offering price of $9.

``We see a lot of good ideas out there, and sometimes investing in a good idea works out,'' Hallaren agreed. ``But this is a very competitive world, so we concentrate on companies with good fundamental revenue and earnings.''

Murphy's law: Wait until a company achieves good sales and profit growth, then invest in them.

Tip No. 5: Evaluate the company's competitive position, its financial strength and the quality of its management.

Find out how well the company stacks up against its rivals, Rogers said. Does it have dominance? Or is it barely keeping ahead?

Also, buy into a company if its sales and pretax profit growth rates are at least 15 percent a year each, Murphy said. In addition, companies should spend at least 7 percent of revenues on research and development.

That's because intellectual assets - such as patents and technical knowledge whose values are not listed on the balance sheet - not brick and mortar, are key factors in the success of a technology company, he said.

Instead of focusing on the stock's price-to-earnings ratio, which measures the relative expensiveness of a stock, Hallaren prefers the price-to-sales ratio - market capitalization divided by sales in the prior four quarters. The higher the ratio, the higher the expectation of a bright future for the company.

``If you have two companies with the same P/E, both are in the same industry, but one is priced at five times sales and the other at two times sales, the one with five times sales is a much more efficient company,'' Hallaren said.

Price-to-earnings still matter, but quality takes precedence.

``We're looking to buy good things, not cheap things,'' he said.

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