Technology, always the roller coaster of stock investments, is lately giving even its most veteran followers a bad case of motion sickness.
After an up-and-down 1990, this year began with a dramatic run-up in high-tech stock prices, fueled by a fascination with the bells and whistles of the Persian Gulf war. Fifty percent gains were the norm for many technology stocks in the first quarter.It was all downhill from there. Amid the discouragement of weak earnings projections and worries about overseas prospects being hurt by impending European recession, these volatile stocks lost much of their earlier gains.
There have been some up days since, responding to a smattering of minor events such as improved semiconductor inventory figures. But the consensus is that technology will be limping along at least through the third quarter and perhaps the fourth. If the economy doesn't respond at all, even those expectations could be overly optimistic.
Big names are under scrutiny. Many analysts are negative about International Business Machine's chance of regaining momentum. Even Big Blue's admirers say results won't show much positive movement until later this year.
The big merger deal in which American Telephone & Telegraph acquired computer firm NCR Corp. evokes skepticism. Critics fear AT&T will meddle too much in NCR affairs and that NCR leaders will flee. Others are taking a wait-and-see attitude, crossing their fingers that this basically sound concept can work.
All this doesn't alter the fact that technology is a growth area with incredible long-term potential. But it underscores the harsh reality that technology investing is difficult, that an investor should buy several stocks for diversity, and that trying to move in and out of this quirky market can have painful results.
"Technology stocks are the X-rated stocks, exciting but violent, the stuff of nosebleeds and heart attacks," observed Rick Martin, senior technology analyst with Prudential Securities. "Far too many investors wind up buying them low and selling them low."
The only stock that Martin is currently recommending is Teradata Corp., a computer systems firm that restructured and has a new product cycle in place. In his "maybe" category are AST Research and Dell Computer Corp., which look good on paper but are subject to what he calls a "flaky" home computer market.
Stock selection is vital.
"Only one in 10 technology stocks in the public market is successful, and we avoid the losers," said Roger McNamee, portfolio manager with T. Rowe Price Science and Technology Fund, a $160 million-asset fund up 43 percent in the first quarter and a modest 5 percent in the current quarter. "The most important trend in this industry right now is the move from mainframe computers to networks of computers, which will benefit a number of companies."
McNamee's largest current holdings are Adobe Systems, Apple Computer, Compaq Computer and Intergraph Corp. Others in his portfolio include Novell Inc., Phoenix Technologies and SynOptics Communications.
Technology is such a maze of odd-sounding names and scientific explanations that investors sometimes just grab any name they hear.
"You must avoid overpaying for the high-visibility technology stocks," said Michael Murphy, editor of the respected California Technology Letter, P.O. Box 308, Half Moon Bay, CA 94019 ($270 annual subscription price). "Right now our newsletter portfolio is totally in cash, for we believe it will be a few months after the recession is over before things get better in the technology industry."
Murphy would buy Apple or Compaq at less than $50 a share, while he'd wait to purchase IBM until it's under $100 a share. None of them should perform all that well over the next two quarters, Murphy believes, but the risk has already been taken out of their prices. Other stocks with good long-term prospects are Seagate Technology and Sequent Computer Systems, he believes.
"Too many people jump on the technology bandwagon and simply expect too much," warned George Niemond, senior technology analyst with Value Line Investment Survey. "They don't have a strong enough stomach to handle a situation where the bottom drops out."
Value Line currently gives high ratings, based primarily on earnings and price momentum, to AST Research, Data General, Novell and QMS Inc.