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Tech stocks get hot.

Once high fliers, these issues are now priced right and poised for takeoff.

Are you the type who flees a room every time "technology" is mentioned? If you think the topic is only for computer jockeys, scientists and math wihizzes, think twice.

Lurking behind the complexities of hard drives, operating systems and newly engineered drugs are big profits. "Technology is a terrific growth area," says Ivan Thornton, vice president/registered investment advisor with Shearson Lehman Bros. in New York. "Things come in waves, and this is the next wave of the future." Our advice: Patient investors should bone up on the technology wars and wait to cash in on the action.

It's no mystery why tech stocks, high flyers two years ago, are taking off again. While America's old-line industries--from steel and autos to airlines and insurance--are declining in the face of foreign competition, its technology industries are blossoming. Tech stocks, in fact, lit up BLACK ENTERPRISE's last Investment Roundtable (see "Creating A Clinton Portfolio," April 1993). As Peggy Forbes, president of New York City-based Woodford Capital Management Inc., explained: "People need to exchange as much information as possible. Companies that [can] keep their products at the forefront stand to do tremendously well."

Companies like Microsoft Corp. and biotech giant Amgen Inc. aren't just U.S. powerhouses, mind you. They are global competitors, with more than half their sales coming from abroad. "This new economy is very competitive," says Michael Murphy, editor of California Technology Stock Letter, a biweekly newsletter based in Half Moon Bay, Calif. Not all of the companies in the race, however, are household names. Some of the most promising, cutting-edge technology concerns are less well-known, and are helping to push technology to the economic forefront: In 1992, says Murphy, technology accounted for over 30% of gross domestic product, and is headed for 50%.

Technology stocks were known for their blockbuster gains, which started in the '80s. Take Redmond, Wash.-based Microsoft, which today sells for $87 a share. When it first went public back in 1986, it traded for just $5 (adjusted for splits). Chris Mortenson, managing director of the investment bank Alex, Brown and Sons Inc., headquartered in Baltimore, was one of the lucky investors who tapped into the initial public offering (IPO) and made a killing. But he laments, "I sold it after it tripled, so I've missed the last 4,000% increase!"

His story underscores one of the fundamental lessons of investing in technology: If the rewards are handsome, the risks are sizable, too. For every high-tech product that succeeds, another dozen never get off the drawing boards, making this sector extremely volatile. In electronics, price moves upwards of 50% and downwards of 25% within the same year are common. In biotechnology, the swings are twice as great. The bottom line: Technology investing is best for long-term investors--those who intend to hold on to the issues for two years or longer.

As technology becomes more pervasive, its benefits become crystal clear. Anyone who has gone from character-based computing (IBM) to graphics-oriented computing (Apple, Microsoft) knows why these companies are doing so well in the marketplace. Biotech stocks take more homework, but the issues aren't impossible to understand. "You'd be surprised how important common sense is," says Jim McCamant, editor of the Medical Technology Stock Letter in Berkeley, Calif. "And one of the things common sense tells you is that if things [that is, a company's products and prospects] stay the same, and stock prices go down, that's a buying opportunity."

Opportunities In Electronics

"Most people know more about technology than they realize," says Dewayne E. Shaw, an institutional stockbroker at Morgan Stanley & Co. That especially applies to the electronics field. "You may not understand Apple Computer's operating system, but you know what a mouse is, and that's something Apple pioneered."

Apple Computer Inc. is a favorite pick among investment professionals right now, in part because the price is depressed. "Apple is my largest and first technology pick," says Shearson's Thornton. "I think everybody should own it." What makes the stock hot? Apple is currently trading at a bargain $55--a full 15% below its 52-week high. The price dip is due to the company's steep spending on research and development (R&D), which is eroding quarterly profits.

"Wall Street is very much focused on quarter-to-quarter earnings," notes Murphy. "So when the Street knocks them down like this, you can step in and buy them."

Plumping up Apple is its "Powerbook" laptop computer, which added $1 billion to the company's bottom line in 1992 and stands to make even more this year due to huge demand. Last March, the company introduced Apple Work Group Servers, three high-end servers for the burgeoning networking market.

Apple is successful because it has defied one of the megatrends sweeping technology--the decline of hardware manufacturers. Apple's technology is proprietary; IBM's is not. Machines that run IBM-compatible software are a commodity, and they sell at razor-thin profit margins. The flip side of the industry--software--is exploding for the same reason. Microsoft continues to own the technology, called operating systems, that dominates non-Apple hardware.

Hard drives, too, are increasingly becoming a commodity. The new investment opportunities there? Companies whose silicon chips and other technology allow more and more data to be squeezed onto the drives. One such company is Read-Rite Corp., a Milpitas, Calif.-based manufacturer of components that allow hard-drive makers to boost the capacity of their drives. The shares were trading recently at $23, or roughly 20% below their 52-week high.

Another equipment supplier for drive makers is Emulex Corp. of Costa Mesa, Calif. While Read-Rite's top markets are the small drives used in portable computers, Emulex caters to high-capacity drives in desktop PCs.

Emulex also sells the connector boards used to link PCs into local area networks (LANs). While this is another area of huge potential growth, Murphy notes that Emulex proposes to divide itself into two public companies, effective sometime this month. He believes investors can pick up shorts in the exciting new companies for as little as $5, or half of what the stock was trading for in early spring.

Networking and it companion, client/server computing, are currently one of the hottest investment areas. IBM stock crashed last year primarily because its powerful, but expensive, mainframe computers are being replaced by cheap PCs strung together into powerful networks. The most powerful PCs on the network are called servers, which regular PCs in the network--or "clients"--access as needed.

Two Wall Street darlings are client/server players

Gupta Corp. and Powersoft Corp. These tiny (Gupta's 1992 sales were just $33 million) Silicon Valley concerns sell software that creates and implements networks, helping companies slash computing costs while boosting productivity. At prices of $23 and $31, respectively, Gupta and Powersoft are expensive. But, experts note that networking continues to be an area of high growth.

Awaiting The Biotech Comeback

In 1991 and early 1992, no area of investing was hotter than biotechnology. But then Bill Clinton was elected, partly on a platform of reining in health care costs. This threatens the entire pharmaceutical industry's profits.

"The whole group is down an average of about 40% from its highs in January of 1992," says McCamant. "Most of these companies are not making money yet, and the stocks are very volatile." So while the long-term outlook is very good--with plenty of room for growth--investors have to be patient.

The market leader, Rahway, N.J.-based Merck & Co. Inc., is America's most-admired corporation, according to Fortune magazine, but its stock has plunged nearly 20% in recent months, to $35. Shares of two biotech leaders, Synergen Inc. of Boulder, Colo., and Thousand Oaks, Calif.-based Amgen, have crashed: Amgen is down more than 50%, to around $35, and Synergen is down over 75% recently, to $10.

Synergen took its biggest hit in February, when it announced that its anti-inflammatory drug, Antril, showed "disappointing" results in clinical trials. The tests showed that the new drug is sometimes effective but isn't the blockbuster that Wall Street was hoping for. Days later, Amgen stock tumbled when the company announced its first-quarter earnings would rise only 20%. Unhappy investors, already nervous about Clinton's health care plans, dumped the shares. The result: Amgen's market capitalization has been cut in half, to about $5 billion.

For McCamant, however, these woes signal "the best time to buy biotechs since the crash of 1987."

"Any recovery in biotech will come from these big names first," predicts Thornton, who says investors are more comfortable with companies that have proven track records and products that make money. "Amgen is my favorite because of their two main products (cancer-fighting Neupogen and Epogen), which have billion-dollar markets each". In addition, he says, Amgen has plenty of upside potential and solid prospects for continued growth.

McCamant favors three stocks that are among the largest biotech and drug concerns. He considers drug giant Merck to be the "best of the large drug companies," even though there's pressure for the company to increase its earnings. At $35, he feels it's as low as it may go. Adjusted for a subsequent split, Synergen, he points out, was trading recently below its IPO price in 1991. The company, says McCamant, does a stellar job of balancing research with product roll-outs, and should have nowhere to go but up. Another favorite is Emeryville, Calif.-based Chiron Corp., which McCamant likes for its broad product diversity and its joint venture with the Swiss drug-maker Ciba-Geigy. From its January 1991 high of $79, the stock currently trades at a more down-to-earth price, about $47.

Who stands to be the biotech giants of the future? Here are three small companies on the West Coast that McCamant thinks could be the next Amgens. All three trade on NASDAQ:

* Isis Pharmaceuticals Inc., down to $6 from an IPO price of $18 in May 1991, is developing a treatment for the human papilloma virus, which causes genital warts and is suspected of causing cervical cancer.

* ICOS Corp., down to $5 from an $8 IPO price two years ago, is focusing on two technologies: anti-inflammatory therapies and treatments for autoimmune diseases.

* Glycomed Inc., at $7 about equal to its IPO price in June 1991, is a leader in developing carbohydrate-based drugs intended to prevent blood vessels from clogging after surgery or angioplasty.

When Is The Price Right?

Figuring the "right price" for technology issues is more tricky than for other stocks. The usual test is to measure share price against earnings, a comparison that's expressed as a price/earnings (P/E) ratio. (A stock earning $1 per share and priced at $25, for instance, has a P/E ratio of 25.)

Tech stocks, however, don't lend themselves as easily to such measures, because many of the companies--especially the newer, unproven biotech companies--don't have the profits or the earnings records to examine. Instead, their value is driven by their potential, such as the hotly awaited medical treatments that stand to eventually reap investors rewards.

Indeed, one of the truisms of high-tech investing is that Wall Street seems to love the stocks when they're expensive and hate them when they're cheap. "The Street was high on Amgen when it was above $60, and won't touch it now at $34," notes McCamant.

If you're looking for larger companies with track records, seek out firms that show at least 15% pretax margins and 15% return on equity, Murphy recommends. "This shows that they can finance themselves," he says. "Limit yourself to those companies, and then figure out which ones have the best price."

But Mortenson reminds investors that "bargain" is a relative term in technology stocks (especially electronics). Since the companies that issue them are growing so rapidly, share prices also shoot up. "If you bought Microsoft at the top every year, you would still outperform the market over the next 12 to 18 months," he says. "You can try to pick the bottom, but I think the easier thing is to find the ideal company and buy the stock."

How to do that? Anyone who shopped for a PC 18 months ago would have noticed that prices were plunging--bad news for hardware discounters like Compaq Computer Corp. and Dell Computer Corp. By the same token, they might also have noticed many ads touting "Intel Inside." Located in Santa Clara, Calif., Intel Corp., which has a near monopoly on the brains of IBM-clone machines, has more than doubled in the last year, to more than $118 a share from less than $50.

Workers who observe that their employer is moving from mainframe or minicomputers to a client/server system should make note of what software the boss is installing. Servers often employ what are called relational databases, and companies that supply them are benefiting. Provo, Utah-based Novell Inc., the pioneer in connectivity--or networking--software has gone from a split-adjusted price of less than $10 in 1990 to $34 currently. That mere 200% price appreciation may not knock your socks off, but during the same three years the Standard & Poor's 500 Index has risen just 33%.

Easing into Technology

Doing homework on technology stocks is relatively simple: Major investor-oriented periodicals cover such companies in depth, and the computer field is rife with both consumer and trade magazines. Mainstream investment newsletters treat technology stocks as a matter of course, but one that specializes in the subject is Murphy's California Technology Stock Letter (a 24-issue annual subscription is $270; call 800-998-2875).

Finding out about biotech stocks is more difficult: Few of these companies even have products in the marketplace. Until recently, McCamant's newsletter, Medical Technology Stock Letter was the only one covering the field (24 issues are $320; call 510-843-1857). Recently, however, a former Forbes magazine writer, Evan Sturza, launched Sturza's Medical Investment Letter ($250 for 12 monthly issues; 212-873-7200).

All the reading in the world, however, won't help you sleep at night if you're too skittish about investing solo in technology stocks. One approach to investing amid so much uncertainty is to put your money with a professional manager via a mutual fund. Several funds invest exclusively in technology and biotechnology.

Fidelity Select Biotechnology is the third-best performing mutual fund tracked by Charles Schwab over the last five years. But over the past 12 months it ranked 338 in a field of 357. T. Rowe Price Science & Technology Fund is the top five-year performer in that category, as measured by Lipper Analytical Services. But in the first two months of this year it was No. 19 in a field of 21.

This approach doesn't necessarily guarantee quick profits: It could take years to revisit the 75%-plus gains these funds saw in 1991. And because they invest exclusively in technology, these funds are considered among the most risky mutual funds. As you would with individual stock, then, make sure to balance your portfolio with less volatile vehicles.

In the meantime, your friends who own Hong Kong contractors or French government bonds may do much better. But unless you're betting the United States will lose the global fight for emerging technologies--and so far it is winning--your chances of reaping substantial gains in technology are great.
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:high technology industry investments
Author:Middleton, Timothy
Publication:Black Enterprise
Date:Jun 1, 1993
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