In a stock market capable of sudden and severe collisions, investors may not want to take a tech ride without a seat belt.
IN THIS PACKAGE
- The pressure on junk bonds
- Be careful, but don't miss phone-tax refund
- Amid volatility, conservative investors run risks
- Workers should watch their retirement plans
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Can they do that?
- Taking stock
- Investors seeing value in mature technology stocks
- The week ahead
- New Products
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Call it conservative tech investing. Or at least more conservative than in the past because many firms are trying to become more predictable and trustworthy. They realize investors are still smart from past disappointments.
"Tech was once valued on hopes and dreams and the wonder of the Internet, but larger companies are now more entrenched and leaders more settled," said Telis Bertsekas, portfolio manager of MFS Technology Fund in Boston. "There are leftover bad feelings from 2000 to 2002 [from the tech meltdown], but the investment approach has become a lot more like other industries."
Larger-cap tech firms carry valuations similar to Standard & Poor's 500 stocks in their price-earnings ratios. They are paying dividends and they are reinvesting in their own shares, Bertsekas said.
Semiconductors are still volatile whenever surprises occur in their end markets, such as cell phones or personal computers. On the other hand, the largest portion of revenues of the big software companies now comes from recurring business, which adds considerable stability to their performance.
Bertsekas recommends shares of Salesforce.com because it is on the leading edge of software distribution on the Internet. Meanwhile, Applied Materials Inc. has settled into a stronger and less cyclical position in semiconductor capital equipment.
Chip giant Intel Corp. and networking king Cisco Systems Inc. are major fund holdings because each has market share of more than 60 percent. They don't grow as fast as in the past, but profit margins and returns are impressive. The investor receives relatively good growth and stability for a reasonable price, Bertsekas said.
"Technology stocks definitely aren't utility stocks, but they are reducing volatility and managing inventory better than they did in the late 1990s," said Taunya Sell, technology analyst with Ragen MacKenzie Group in Seattle. "In terms of risk, it always comes back to how a particular stock is valued."
Sell predicted growth in personal computers of about 8 percent to 10 percent a year. Meanwhile, the iPod and MP3 player market won't stay as hot as it has been the past couple of years, and neither will the cell phone market, she said.
Although there are caveats, new products with potential are continually coming to market, Sell said. That means picking stocks in segments of the tech market with better growth possibilities than their valuations would seem to indicate.
"Don't hold a grudge from six years ago, since some of the most compelling Internet and software investment ideas come from the fact that skeptical investors have kept them from getting overhyped again," said Patrick Walravens, software analyst with JMP Securities in San Francisco. "Valuation matters, since you want a stock price supported by cash flow and reasonable compared to its peer group."
The best time to buy software stocks is generally during the quiet summer and definitely not immediately after year-end results come out, Walravens said. So wait a little while before making a move.
"Predictability is huge in software," Walravens said. "If a company is predictable and you believe it has solved a business problem, you can just buy and hold it rather than try to trade around the corners."
One controversial player, Ariba Inc., didn't live up to all the big plans it made during its heyday. But it has put the excesses of the past behind it, Walravens said. Its core business of helping companies do a better job of purchasing non-payroll goods and services always has been strong, and it has converted almost entirely to a subscription revenue model. It remains priced much lower than its on-demand software company peers.
RightNow Technologies Inc., provider of software for customer call centers with a suite of marketing, sales and service software, is another Walravens selection. Informatica Corp., a developer and marketer of enterprise data integration software and services, looks good, he said, because its chief executive is buying the shares on the open market in his excitement over a new launch later this year.
"Conservative means you are oriented toward companies of higher quality," said Richard Cripps, chief market strategist with Stifel Nicolaus in Baltimore. "If you are interested in investing broadly, you should have technology in your portfolio and you can do that in a conservative way."
Higher-quality tech firms that pass muster with his firm's computer screens include Microsoft Corp, IBM Corp. and Canon Inc. Others are FactSet Research Systems Inc., providing tools for financial data, and Total System Services Inc., an electronic payment processing firm spun off from Synovus Financial Corp.
"What used to be a cowboy-driven industry in its early years is now more mature," Bertsekas said. "Tech is a global industry that is still gaining share of total gross domestic product worldwide, so it will continue to grow faster than the rest of the economy for a long time."
Andrew Leckey is a Tribune Media Services columnist.