To tech or not to tech

Black Enterprise, April, 1996 by Robert A. Bennett

IF YOU LIKE ROLLER COASTERS, YOU'LL love technology stocks. Few areas of the stock market today are as volatile--within months, even days, it's possible to make or lose big bucks. Even the experts sharply disagree over whether the market in technology stocks will soar or plummet. But one thing is certain, it's unlikely to stand still. Technology is a very broad area, indeed, including makers of computers and computer components, such as chips that serve as a computer's "brains," to peripherals such as printers and modems that connect computers to phone lines. Technology stocks also encompass telecommunications companies and firms that produce software programs. To help you sort out the issues, BE invited five experts in technology stocks to a roundtable discussion last December. Because of the extreme volatility of the market, much may have changed between then and now.

Our experts were Mellody Hobson, senior vice president, Ariel Capital Management; Owen May, chairman and CEO, the May Davis Group; Larry Jones, chief investment officer, W.R. Lazard & Co.; Deborah Frazier, assistant vice president and senior financial consultant, Merrill Lynch; and Ron Scott, president and co-chief investment officer, Nubian Asset Management.

Following are excerpts from the debate:

BE: Where do you see technology stocks going?

DEBORAH FRAZIER: At this time, we're recommending that investors be very selective in the technology stocks they buy. We've lowered our outlook on semiconductor stocks, and we're definitely more bullish on telecommunications and information processing. There are some very, very good opportunities available to investors in those areas.

LARRY JONES: Technology is a very important part of what we do at W.R. Lazard. We're primarily growth-stock investors, and often the growth of technology companies is 10 to 20 times the level of real GDP growth in the United States. For that reason, we're almost always highly weighted in technology. Over the years, the proportion of technology stocks in our portfolio probably ranged from 18% to 40%. Right now, we're midway into that range.

Investors have shown a willingness to pay 20 and 30 times earnings for companies that they are sure will deliver mid- to high-teen-type earnings growth.

OWEN MAY: May Davis remains very bullish on technology stocks. The fall in the price of dynamic random access memory chips opens up new opportunities for software companies. Because consumers can get more memory for their money, software companies can create memory-hungry programs, such as those with terrific graphics.

More importantly, as software companies become more innovative, we're going to see an increased demand for resources like the Internet. People are just now playing with the Internet, but soon they will be using it for finance, banking and marketing. This whole cyberspace phenomenon is much bigger than we can put a number on right now. Everyone laughed when Home Shopping Network came out on TV, but no one realized how big the phenomenon was going to be. Similarly, over the next 12 months, the World Wide Web will increase phenomenally.

MELLODY HOBSON: We take a different view at Ariel. This is a time for extreme caution in technology investing. The market currently is in a mania, and most manias are followed by sharp declines. Investors who are looking at technology stocks or at mutual funds heavily weighted in technology stocks should be very, very cautious. This has been an unprecedented period. Valuations are very, very high. People are saying, `buy concepts, valuations don't matter.' Talk like that makes us nervous. Tech stock prices currently are totally unrelated to value. That goes against everything we believe. The downside risk is very great and so we think investors would be better off if they allocated money to other areas of the market.

RON SCOTT: Nubian is selectively bullish. We don't feel that you're going to see the dramatic returns in 1996 that we've seen in 1995. We've been concentrating on the Internet. Some 24 million people have used the Net this year. That surpassed everyone's expectations. You should have 75 million to 100 million users by 1997. The Internet is a way of doing business. It's limitless. The commercialization of the Internet will be big. We have overweighted our portfolio particularly in stocks that provide high-access phone lines. Demand for such technology will grow as more users get on the Net. No one is going to want to wait an hour or two to download information. They're going to want the fastest line possible.

Regarding other sectors of the market, semiconductor stocks are not ready to be bought yet, but they're substantially off their highs. Intel and Advanced Micro Devices are trading at nine and 10 times earnings. These companies are destined to come back as PC demand increases two or three years out.

JONES: Technology is not a homogeneous group and it doesn't stay in one place for very long. You can find both growth and value stocks.

We think that high speed telecommunications will be where money is made. So, we like providers of cable modems, ISDN (fast telephone lines) and cable companies that have subscribers hooked into their systems.