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Stock Watch / David Olmos

Bargain Buys May Be Lurking Among High-Tech Issues, Big Losers in the Crash

November 01, 1987|David Olmos

In the minds of many investors, the terms "high technology" and "high risk" have been closely linked.

So, as the up-and-down stock market looks increasingly risky to many investors, it's no big surprise that high-tech stocks are taking more than their share of the lumps.

Small technology companies in particular "have been killed" during the market's dramatic decline in recent weeks, said Richard A. Shaffer, a New York technology analyst and newsletter publisher.

William Welty, research director for Hambrecht & Quist, a San Francisco securities firm, agreed that technology stocks "got hit far worse" than other industry groups. He noted that even under normal market conditions, technology issues tend to be more volatile than other industry groups.

One measure of how high-tech stocks fared during the market crash is the performance of mutual funds that specialize in technology companies. According to Schaffer's Technologic Computer Letter, the net asset value of three such funds suffered a sharper drop than the overall market. From Oct. 15 to Oct. 22, the value of Alliance Capital's Technology Fund fell 28%, Fidelity's Magellan Fund dipped 20%, and Merrill Lynch's Sci Tech Fund declined 21%.

In comparison, Schaffer's newsletter notes, the New York Stock Exchange composite average dropped 17%, while the NASDAQ over-the-counter market fell 13%.

The Hambrecht & Quist Index, which includes more than 100 technology companies with annual revenues of less than $200 million, plunged from 742 on Oct. 5 to 385 last Monday. The 48% decline, Welty said, was "unprecedented in both speed and extent."

In Orange County, lots of high-tech companies have taken a drubbing.

Last Wednesday, for example, 40 of 132 Orange County companies' stocks (not all of which are high-tech issues) were trading below their book value, according to Newport Securities.

Jeffrey Kilpatrick, president of the Costa Mesa-based brokerage, which specializes in local stocks--said such companies as Alpha Microsystems, AST Research, Emulex and Printronix have been especially hard hit. Some companies, such as Western Digital and MSI Data, posted strong gains late in the week, recovering some of their earlier losses.

Analysts generally agreed that the market's decline has created a bargain hunter's paradise, although they cautioned investors to shop wisely.

In Orange County alone, "there are more companies at cheaper, better values than any other period in the 10 years I've been here," said Kilpatrick. "Some of these small technology companies that are trading at panic liquidation prices have got to be good values."

Michael Murphy, who publishes the California Technology Stock Letter, a San Francisco-based investment newsletter, sees several attractive opportunities among Orange County firms.

Among the stocks he was recommending last week were Computer Automation, which closed Friday at $6.625; Applied Data Communications, $2.375, and Newport Electronics, $2.75.

"There are some extraordinary buys because of the collapse of the markets," said Hambrecht & Quist's Welty. "Unless Chicken Little is right, we think this is an attractive time to be buying growth stocks."

Welty suggested some guidelines for investors to separate bargains from the bummers among technology stocks: The company's primary product should offer purchasers cost savings or productivity improvements; it should be a product that the company's customers cannot do without, and the company should be involved in bringing major new products to market or seeking major new markets. Analysts said the market drop is likely to pose problems for some small- and medium-size technology companies because in an uncertain market, investors are more inclined to put their faith in blue-chip stocks, which in the high-tech area means companies like IBM and Digital Equipment.

Investors "are looking for bargains in stocks they know well," Schaffer said. "If you think you can get a deal with Digital Equipment, why should you mess with an AST Research? (AST disappointed Wall Street when it reported sharply lower earnings earlier this month.) The biggest buyers are out of the market for smaller high-tech stocks."

Industry observers said high-tech firms face several other problems as a result of the market's drop. Venture capital financing will be scarce, and the market for initial public offerings will dry up at least until early next year, they said.

Moreover, if consumer confidence is shaken by the market's problems, or if the economy slips into recession, technology firms would be bruised along with everyone else.

"If this affects peoples' mind-sets, particularly at the Christmas season, there could be a problem," said Charles S. Strauch, chief executive of MSI Data. "You have a lot of companies that have not paid attention to their balance sheets," Strauch said. "I'd say they're worried."

But Schaffer believes that the high-tech industry, in general, is in better shape to weather a downturn than it was during the 1985-86 slump. "The computer industry is healthier than it has been in a long time," he said. "We're at the start of new product cycles, and we've gone through two years of layoffs and inventory reductions."

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