Money: Be wary of tech stock bandwagon

By Philip Macalister

Everywhere you turn, you read about tech stocks - how high they have risen, how much they have pushed up the indices and how rich they have made people.

Then you look at your portfolio and see it is full of old blue-chip New Zealand companies like Brierley Investments, Carter Holt Harvey and Fletcher Forests. The chances are that when you compare the graphs of your shares against the Himalayan peaks of the tech stocks, yours will look to be the plains and the valley of the investment world.

You have to ask yourself then, how do you get a piece of this tech action and make some big money?

Well it is not as easy as it looks. First of all you have to decide what is technology, then start looking around.

One of the surprises is that many stocks you do not think of as being technology stocks in fact fall into that category. For instance, Telecom, Sky TV and even Baycorp are all technology stocks, as are the pure tech players such as Advantage Corporation, IT Capital and Strathmore.

Technology can be broken down into five broad categories. The first of these is mobile data or, as some call it, the wireless world. Companies involved in this area provide equipment or networks for transmitting data such as e-mail, share prices and information.

One of the big sectors, particularly in the United States, is the semiconductor business. Semiconductors are the chips and circuits that are the vital organs inside most digital electronic devices such as PCs, cellphones, DVDs and Playstations.

With all these devices and methods of transmitting data there is a third market comprising storage systems.

The fourth market is the infrastructure that supplies all the bits that make the machines in the other areas work. Companies in this area range from the software provider Microsoft to computer maker Dell and Cisco Systems.

The final market - and the one that gets the most attention - is the dot.com or internet business market.

Dot.com stocks are a bit like Miss Universe contests. All the attention is focused on the winner, yet there are other beauties on stage as well.

There is a growing acceptance that information technology is transforming the world, both at a business and a personal level. However, it is no different from earlier revolutions, such as the introduction of the railway and the telegraph.

Because of information technology, the world economy is advancing at a rapid pace, and businesses are able to increase their productivity and make bigger profits.

While this revolution has been going on for some time, it is only in the past year or so that people have really started to appreciate the impact of information technology - and work out how they might make money from it.

But as BT Funds Management chief investment officer Craig Stobo points out, it is not limited to the new "online economy." Traditional smokestack industries, such as car building and steel making, are also benefiting.

Fiduciary Trust International executive vice-president William Yun says business-to-business technology applications are improving the position of some of these older businesses.

He says the Ford Motor Company in the United States spends $US122 billion on goods a year and it is estimated the company will have earnings per share (EPS) of $US5.88 in 2000. If it can use technology to reduce its costs by just 5 per cent a year, it will boost its EPS by a huge $3.30. If it managed to save 10 per cent, then the EPS boost would be $6.60.

How should you get into the technology sector?

There are three ways of getting exposure to the tech sector, and each has specific benefits.

First, you can buy shares directly either in the New Zealand market or overseas. Buying in the New Zealand market is risky because the sector is small and, to a large degree, unproven.

A better option is to buy shares in the Australian market where there is a greater range of stocks, plus the sector has a longer track.

Probably the most preferred direct option is to buy shares in companies listed in the United States market. Most share brokers will be able to transact this business for you, however not all will be able to provide research on the companies.

As an alternative to buying directly and taking on the risks, you can buy into a specialist tech managed fund. The problem is that there are very few options available here, and New Zealand-based managers have, as you would expect, a wide range of views on the sector.

AMP Asset Management equity manager Stephen Walker says he has looked at New Zealand's tech stocks but found nothing worth buying.

"We haven't seen anything in New Zealand which is worth investing in, besides Telecom. A large amount of it I would call speculative, especially at these prices."

At the other end of the spectrum is New Zealand Funds Management, probably now the biggest institutional investor in the tech sector with the news just over a week ago that it had taken a 5 per cent stake in Strathmore. It is also a significant shareholder in Advantage Corporation and Baycorp.

While no New Zealand managers are yet offering dedicated tech funds, that is expected to change soon.

The third option is a hybrid of the other two - that is buying a listed tech fund, either in Britain or the United States.

Two of the British listed investment trusts used in New Zealand are the $US1.05 billion Henderson Technology (Henderson is a subsidiary of AMP) and the $US207 million Finsbury Technology Trust.

Both these funds have experienced tech managers and both have posted impressive returns in the past three years. Henderson did 184 per cent last year and 287 per cent over the past three years, while Finsbury has returned 299 per cent and 384 per cent in the one and three-year periods respectively.

Craig & Co is quite active in the tech sector and offers several US listed funds including QQQ, an index fund which tracks the top 100 stocks in the Nasdaq index.

For the very brave, there are opportunities to invest in unlisted New Zealand "technology offerings" such as charting software provider Henley and discount brokerage MoneyOnLine.

Craig & Co analyst Cameron Watson says the first rule for serious technology investors is to stick to quality.

"This means companies with strong share prices, and strong earnings, together with a dominant product or service, exceptional management and a strong balance sheet.

"Many of the New Zealand net stocks have strong share prices, but scant earnings to back them up. Some have questionable management and weak growth strategies and products. As a group on the world stage, they simply don't cut it."

The other thing to be aware of, especially if you take the do-it-yourself approach, is that the tech sector is volatile.

Fiduciary Trust's Mr Yun says that in the past year many of the listed United States tech stocks have fallen considerably. For instance, e-tailer e-Toys is down 76 per cent from its 52-week high, online sharebroker E*Trade is back 64 per cent and online auctioneers ebay is off 39 per cent. Infrastructure provider Cisco Systems is just 4.5 per cent below its 52-week high.

The message here is that dot.com stocks that are not turning a profit and do not have a strong business plan or a big competitive advantage are suffering.

Established profitable companies in other parts of the sector, which have a good track record and growing earnings, have a much better future.

"The froth will be blown off the market," Fleming Investment Management director Andrew Watkins says.

"The question is whether the froth takes away some of the coffee.

"The only true experts are those running the tech funds."

* Philip Macalister is the editor of online money management magazine Good Returns www.goodreturns.co.nz. Good Returns provides news on managed funds, mortgages, superannuation, insurance and financial planning.