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Figuring the Future of Tech Stocks

August 22, 1994|TOM PETRUNO

As a symbol of investors' rejuvenated interest in technology stocks, not much beats the hot streak of IBM Corp. shares in recent weeks.

The long-ailing computer giant's stock surged $1.875 on Friday to a 20-month high of $68.125, helped by upbeat comments from two well-known Wall Street analysts. Measured since the end of June, IBM's share price is now up 16%.

Many IBM buyers are focusing specifically on the prospect of faster computer sales growth overseas, as the economies of Europe and Japan pick up speed. The summer rebound in tech shares generally, however, seems driven more by a realization that the vicious spring selloff in these stocks was overdone.

In dumping tech issues during May and June, investors were responding to fears that sales and earnings would be victimized by a slower U.S. economy (courtesy of the Federal Reserve Board). But in July, many or most tech companies' second-quarter earnings reports put those fears to rest.

Just last week, electronics leader Hewlett-Packard and software producer Autodesk both reported results for their quarters ended July 31, and the numbers were so surprisingly strong that Hewlett's stock immediately leaped 11% and Autodesk's rocketed 17%.

The resurgence of tech shares overall this summer has already been powerful enough to lift a key tech-stock index back into positive territory for the year-to-date. The 200-stock tech index compiled by San Francisco brokerage Hambrecht & Quist, which dove 13% between the end of February and the end of June, now is up 3.6% for the year.

In contrast, the Standard & Poor's 500 index of blue chip stocks is down 0.6% year-to-date.

Beating the S&P so far this year is a continuation of an important trend for tech investors: Despite hair-raising volatility in the stocks, the H&Q index has posted bigger price gains than the S&P every year since 1990.

That contrasts vividly with the 1986-89 period, when the H&Q badly lagged the S&P in three of four years.

Yet tech stock bulls complain that Wall Street still treats the computer business as if the plug could be pulled at any minute, without appreciating how large, how global and diverse an industry it has become.

Although it's certainly true that the tremendous speed of technology product cycles means there is high risk in owning any single tech stock, the greater risk may be in failing to own a piece of a diversified tech portfolio in the '90s.

Efficiency, after all, is what the world economy rewards most highly today, and efficiency is what technology promises.

Here, three tech-stock veterans explain their optimism about the industry and where they see the greatest potential for investors:

* Michael Murphy, editor, California Technology Stock Letter, Half Moon Bay, Calif. A bear on the stock market overall, Murphy is bullish on the tech sector for a simple reason, he says: "Valuations on technology-driven companies are no higher than 'other' companies, even though (tech companies') real growth rates are three or more times as high." That disparity "can't last," he says.

Murphy believes Wall Street is just beginning to realize the true value of tech companies' franchises. Why now? In large part, he says, it's because so many investors now are part of the tech revolution via personal computers.

Technology, Murphy says, "has been demystified" by its spread. So the old argument against investing in tech stocks--"Don't buy what you don't understand"--is no longer valid, he says. "People have not only lost their fear of the unknown in technology, they are actively embracing it."

More important, the global growth potential in computers and related equipment, telecommunications, biotechnology and other tech sectors remains spectacular, Murphy says.

For example, whereas there are 150 million personal computers in the world, he estimates that there are 250 million people who have the skills and income to buy a computer today but haven't yet done so.

The semiconductor industry alone, Murphy says, will invest $100 billion in new plants and equipment over the next five years to meet the world's burgeoning demand for computer chips--now standard equipment even in the lowliest household appliances.

Yet Intel Corp.--the premier name in chips--is a mere $63 stock. At that price, Murphy notes, it sells for just 11 times this year's estimated earnings per share. The S&P 500 index, in contrast, is priced at 15 times estimated 1994 earnings.

The point, Murphy says, is that tech stock prices as a group don't come close to discounting the industry's future growth. That makes this a must-own business, he says.

Besides Intel, his "core" tech holdings include disk-drive giant Seagate Technology, work-station maker Sun Microsystems, and Vitesse Semiconductor.

* Roger McNamee, money manager, Integral Capital Partners, Menlo Park, Calif. Like Murphy, McNamee finds the still-depressed prices of many tech stocks quite at odds with the companies' outlook.

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