Picking the high-tech winners - stock analyst Michael Murphy publishes 'California Technology Stock Letter'

Nation's Business, May, 1993 by Steven B. Kaufman

Michael Murphy grew up in Newark, Del., the son of a Du Pont engineer, and he had no burning desire to do anything in particular. But he did well enough in school to get himself admitted to Harvard. His studies led him to economics and subsequently awakened a fervent interest in the stock market and, especially, high-technology stocks.

Today, Murphy, 51, works with four colleagues in computer-strewn offices above a Thai restaurant in Half Moon Bay, Calif., just south of San Francisco. He is a near-legend in nearby Silicon Valley for his stock-pricing prowess. He is editor of California Technology Stock Letter, the nation's only newsletter that focuses solely on technology stocks--and one whose model portfolio ranked fifth best among 77 newsletters tracked by Hulbert Financial Digest, with a 147 percent return for the 5 1/2-year period that ended in June 1992.

Murphy is widely admired because he spends endless hours tracking technology stocks at industry conferences and through computer analysis--and richly rewards most of his 1,000 subscribers.

He made one of his better calls in November 1990, when he strongly recommended the purchase of Advanced Micro Devices (AMD) after learning that the company was on the verge of introducing a clone of Intel Corp.'s 80386 microprocessor. AMD's stock, then $4 a share, moved up to about $14 only five months later.

"Mike was the first to verify the AMD 386 rumor," says Jerome Dodson, president of Parnassus Fund, a San Francisco-based mutual fund that bought an additional 50,000 shares of AMD after reading Murphy's newsletter. "That alone was worth the price of the subscription." His newsletter is $350 a year for 24 issues.

After he graduated from Harvard in 1963, Murphy got a job that gave him the opportunity to work on the IBM 1403-- the first computer that used transistors rather than vacuum tubes.

The computer allowed Murphy to track the sales of thousands of food products at 200,000 outlets worldwide--work previously undertaken by more than 400 people--and Murphy fell in love with the machine's capabilities.

"It showed me you could replace a tremendous amount of human effort with just a little bit of electronics," Murphy recalls. "It was a real eye-opener that a machine could be that powerful."

Murphy became a programmer, and then, in 1968, he left his first employer to take a job as a stock analyst. He covered a variety of industries but spent more and more time on high technology. Silicon Valley was taking shape, and Murphy became enamored of technology's superior growth characteristics.

"Early on, I figured I would be better off analyzing growth companies with the wind at their back," Murphy says. "How can you not be excited by the idea that you can start a company from scratch and build it into a $500 million business in five years?"

Murphy began publishing his newsletter in January 1982, on the cusp of the explosion in personal computing that continues today.

A Murphy innovation is the growth/flow ratio, a new way of valuing technology stocks. It is similar to the familiar price/earnings ratio, but it adds spending for research and development into the earnings component, from the belief that R&D sets the stage for future products and earnings.

"On average, technology companies spend at least 7 percent of sales a year on R&D," Murphy says. "The more they spend, the more they can drive their own growth, almost regardless of what is happening in the economy."

An added plus of the growth/flow ratio, Murphy says, is that Wall Street views R&D spending solely as an expense that chips away at the bottom line. That depresses the stock price of big R&D spenders, making them even more attractive investments. Murphy is especially bullish on technology companies in the coming years because they "know how to generato growth without raising prices. That means tochnology stocks will be among the best investments in the '90s."

That should be an unusually big advantage in an era of relatively sluggish economic growth.