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Remember the good old days, those days before the bubble burst in March of 2000?
Those seemed like the days when anybody could make a killing by just investing in tech stocks. If it had a dot.com in its name it was a winner. If it involved fiber optics it was a sure thing. Broadband was the new buzz word. Microsoft was going to be brought to its knees by competitors who would take advantage of its legal woes by creating new language and new source codes. Technology was a growth sector which took the phrase "a chicken in every pot and a car in every garage" and turned it into "computer in every home capable of push-pull technology."
Now back to reality. While the "tech-laden" NASDAQ is up up 82 percent from its Oct. 9, 2002 nadir, it's still off 60 percent from its all-time closing high of Mar. 10, 2000, proving that anything that drops from a high enough level is bound to bounce.
Not only is this growth sector a little long in the tooth, but it's now made up of separate and disparate industries that have characteristics all their own. How diverse has tech investing become? Just look at this list of "Ten Tech Trends" from the Feb. 23, 2004 issue of FORTUNE:
- Smart Dust Kicks Up a Storm
- Role Changing Roils Tech
- China Sets the Standards
- Open Source Opens Its Wings
- There's No Stopping eBay
- Wi-Fi Where You Want It
- HDTV Comes Into Focus
- Subscription Burnout
- The Bells Call For Help
- The Internet Ads Up
Smart Dust? China? Open Source? Not topics that have much in common -- other than the fact that they're all considered part of the tech market. That's one of the reasons that mutual fund ratings company Morningstar hates concentrated tech funds -- they mix apples and oranges, and can be quite volatile as a result.
You can't count on past knowledge. Notice the above list has little or nothing to do with the hot tech topics of the '90s? Forget what you knew about investing in PCs, semiconductors, routers, optical switches, accounting and human resources software and browsers.
So what's an investor to do? I'm afraid the answer isn't sexy or easy: Homework.
Know the company in which you're thinking about investing, and know what news the market has already discounted. For example, consider Intel (INTC). The world's largest chip making concern is due to release its mid-quarter update after today's closing bell. These progress reports get intense scrutiny from investors. They read every word and try and find hidden meanings in each pronouncement. Often the report must stand up to the expectations and so-called whispers that circulate well in advance of the update. And Wall Street is known for "buying the rumor, selling the fact," having milked any possible advantage out of their position well before the actual report is released.
Many companies resist the guidance game, refusing to give mid-quarter forecasts that could deviate from past performance or previous forecasts. But many of these forecasts take into account the big picture -- macroeconomics -- analyzing the nation's economy as a whole, including such statistics as tomorrow's unemployment rate inflation, capacity utilization and industrial production. Investors need to know how the big picture affects the bottom line of potential investments, especially various industries in the technology sector.
Another variable to consider is price-earnings ratios, frequently referred to as valuations. P/Es often signal when a company's stock is overpriced relative to the broader market. Business software and services concern Cognizant Technology Solutions (CTSH), for instance, has a forward P/E ratio more than twice that of the S&P 500. That doesn't mean that its share price is setting up for a fall, but it is a warning flag for money investors who prefer what they think of as value -- a P/E ratio lower than the broader market.
Finally, investors should consider qualitative variables. Is the company's market larger and growing? Is the balance sheet easy to understand? Is management strong? Do company executives and insiders own a lot of stock?
If all these tips sound like they could apply to any stock, it's because they can. If there's one thing we should have learned in the bear market of 2000 to 2002, it's this: Business and investing fundamentals apply to all sectors, no matter how hot they may seem at the moment.
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