High-tech stocks lofting out of their three-year market slump
| San Francisco
High tech and biotech -- buzzwords of the 1980s -- lost their glamour on Wall Street two years ago. Everybody was hawking personal computers and software, semiconductors and esoteric gizmos. Initial public offerings (IPOs) of high-tech and biotech enterprises were at a record high.
But prices on electronics products were falling, and many buyers were mystified about just how high tech was supposed to make their lives better. Big claims were made for genetically engineered plants and drugs, too. But mostly these were promises; few products actually made it market.
When Wall Street soured on high-tech/biotech in mid 1983, these stocks nosedived.
Now -- with more modest claims from brokers, more caution from investors, and more specialization within the catchall category -- ``high tech'' is making something of a comeback.
``We are not anywhere close to where we were in 1983 in terms of the freneticism of the [high-tech] market,'' says Thomas S. Volpe, president of San Francisco-based Hambrecht & Quist. ``It's a lot more rational and controlled right now.''
When investors talk high tech, the name Hambrecht & Quist usually comes up. H&Q, headquartered just north of the fabled Silicon Valley, has made a name for itself over the past 18 years as an investment banker for electronics, software, biotechnology, and other such enterprises.
The firm's venture-capital and corporate-finance roster reads like a roll call of high-tech's best and brightest: Apple, Apollo, Stratus, and Encore computer companies; Cullinet software; Genentech medical technology; and assorted exotic-sounding ventures such as Xidex, Rexon, LSI Logic, and so on.
H&Q maintains an index that tracks technology growth stocks (companies with annual revenues less than $200 million). Since a near-term low on Oct. 9, the H&Q growth stock index has risen 34 percent.
That would be more impressive a rise if the Dow Jones industrial average had not gained 36 percent in the same period. But the broader Standard & Poor's 400 was up a more modest 29 percent in the same time span.
It is true that a rising stock market lifts all boats. But it still looks like recovery for a sector the market had been shunning. Technology stocks, recalls Mr. Volpe, ``were essentially in the doldrums for 2 years -- June '83 to the end of 1985.''
The comeback of high tech is confirmed by other investment hands. Albert Elfner of Keystone financial group in Boston, for instance, notes that ``in the last month, technology stocks have come back in favor -- but it's been very, very recent.''
Besides signs of renewed investor interest, high-tech and biotech IPOs are on the rise, too.
``It's only recently,'' says H&Q's Volpe, ``that the capital markets have been sufficiently attractive to enable those companies to go public.'' But now, ``from a capital market standpoint, we're in an upcycle.''
In the early '80s, high tech was so hot that ``too many companies got funded,'' Volpe concedes. Sectors such as engineering work stations, local-area networks, microcomputer software, and Winchester disk drives got crowded, and ``we have gone through a culling out process.''
But for those that bucked the shakeout, ``it's a lot less competitive world than it used to be. . . . There aren't 50 companies chasing after the same market.''
Volpe's list of high-tech sectors that are experiencing investment booms begins with genetic engineering. He calls this ``a major, major new industry that I don't anybody fully appreciates and that has implications throughout the economy.'' Biotech will affect agriculture, medicine, chemicals, waste treatment, and many other areas, he says.
Artificial intelligence comes next on his list, although he says the timing of AI ``from a commercialization standpoint is tough to predict.''
Also entering growth phases and attracting investor interest, he notes, are the makers of supercomputers, super minicomputers, and scientific computers; firms that develop new computer architectures such as parallel processing; and communications technology companies, especially those involved in voice/data transmission.
``There are always new markets coming along,'' Volpe says, ``but those are the ones I think will be particularly active [for] the next three years.''
The overpopulated personal computer industry, he says, still has growth potential, but it must wait for ``the next leap in technology'' -- probably new developments in ``user interfaces.''
Semiconductors also have some market expansion left, he feels, even in the commodity-semiconductor area. A year-long glut of chips appears to be ending; the crucial ``book-to-bill ratio'' is improving; and the strengthening of the Japanese yen against United States dollar has helped the competitive pricing of US chipmakers.
The semiconductor industry in many ways is a microcosm of the entire high-tech industry.
As Volpe puts it, semiconductors are the ``gasoline that drive the engine.'' Like gasoline what is bad for the semiconductor industry -- i.e., the surfeit of chips and their falling prices -- is good for the other technologies that use these components.
``It benefits the Stratus Computers and the Apollo Computers and the Convergent Technologies and the Apple Computers. If you look at the computer companies, their gross profit margin has been increasing because their component costs have decreased so much.''
Volpe argues that technology stocks are not really comparable to those in industries such as steel, textiles, or automobiles. Technology is more overarching, he contends, and it is natural to expect companies to be born, expand, and perhaps contract during a rather short time span. But new companies are always coming along -- regardless of whether or not the stock market is keen on high tech.
``The naysayers when the market got bad in '84 and '85 said technology's dead. Well, technology stocks might have been dead, but the companies were far from dead.''
Since H&Q is in the business of ``growing new companies,'' says Volpe, the attitude of the stock market is not of primary concern. On Wall Street:
The historic bull market remains at record heights.
The Dow Jones industrial average stands at 1,821,72 going into the new week, up 53.16 points in four trading sessions. The market was closed Friday.
Since the first of the year, the Dow has gained more than 275 points.
Among reasons for the continued optimism among investors last week: The latest (February) consumer price index is running at an annual minus 4 percent; market interest rates continued to fall; and the February merchandise trade deficit improved dramatically.
Most of these encouraging economic signals can be traced back to falling oil prices. But the trade deficit numbers appeared to show a strengthening of United States exports.
The US economy appears to be reviving, too, after a torpid winter, and this raises the possibility of better corporate earnings in the months to come. The index of leading indicators rose a sharp 0.7 percent in February, the Commerce Department reported last Friday.
In this favorable economic environment, most investors apparently feel it is better to be in the market than out of it. Institutional money managers report vast funds continue to flow into equity investments.