Most Investors Undervalue Tech Stocks, Analyst Says

Volatility if OK

By , Staff writer of The Christian Science Monitor

Where some people see a risky roller coaster, Michael Murphy spies a bright pot of gold.

The investment luster, says Mr. Murphy, comes from high technology companies, but for investors, lately, high-tech stocks show more tarnish than shine. Big name stocks such as Intel and Compaq, symbols of the personal-computer revolution, have tumbled as outlooks dim.

But if some investors are having second thoughts, Murphy, publisher of a newsletter on high-tech stocks, is not.

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You'll be sorry, he says, if you don't pay attention to high-tech.

Sure, the short-run bumps rattle.

Intel fell victim to a price squeeze: the growing popularity of cheap computers versus the premium price charged for its standard-setting chips.

And excess inventory prompted Compaq to warn of lower earnings.

But "is there any slowdown in end-user demand? There really is not," says Murphy, editor of the the California Technology Stock Letter in Half Moon Bay, Calif.

Buy both stocks, he says, for their solid long-term outlook.

Contrary to appearances, falling product prices are the essence of a technology's success, he contends. As prices fall, more people can buy cellular phones, surf the Internet, and put computers in their family rooms.

"Most people - including investment professionals - are woefully underinvested in the greatest opportunity of our generation," Murphy writes in his new book, "Every Investor's Guide to High-Tech Stocks and Mutual Funds" (Broadway Books, $27.50).

Technology already makes up 15 percent of the US economy - and that share will hit 40 percent within a decade, assuming high-tech sales keep growing by 20 percent a year.

For the US economy, that means more exports and high-skill jobs.

For investors, it means big profits.

Murphy's rule of thumb: Subtract your age from 100, and the result is the percentage of your assets to invest in what he calls "the New Economy."

That's an extreme view.

Traditionally, many financial advisers recommend that amount for stocks of all types - not just one sector.

Even for tech-oriented investors, this approach may sound unwise, given the tremendous volatility of tech stocks.

Intel, for example, hit $101 a share in August, then swooned to $68 by December. By late February, it had charged back up to $95, then plunged to $76 this month.

But short-term volatility, says Murphy, isn't the same as long-term risk. Smooth out the bumps, and high-tech's record looks impressive.

Six years ago, for example, Intel sold for $5 a share. And for the past 10 years, mutual funds investing in technology posted annual gains of 19 percent, versus 15.3 percent for the average US stock fund, according to Morningstar Inc. in Chicago.

That means $100 invested in high-tech in 1988 would be worth $570 today, versus $415 in an average stock fund.

So even if you don't follow his subtract-your-age rule, some bulking up on high-tech may be warranted.

In addition to Intel and Compaq, Murphy also likes Applied Materials, the leader in chipmaking equipment. Watch for seasonal patterns, Murphy says. Often dips in February/March or from Labor Day to mid-October create buying opportunities.

The easy way to invest is through mutual funds. But you'll still have homework.

Some funds have better track records than others. And you must decide between broad-ranging tech funds or those that focuses on a niche: Fidelity (800-544-8888), for example, offers separate funds focusing on software, communications, computers, electronics, and biotechnology.

Murphy manages a biotech fund and the Murphy New World Technology Fund (650-726-8495), which has struggled to match the tech-fund averages.

"We bet on small stocks instead of big stocks, which was a mistake," Murphy explains. And half the portfolio is currently in biotech, an industry that he sees as undervalued by Wall Street.

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