Tech stocks: time to play - or stay away?
Experts: Don't expect to quickly recoup three years of losses
Most of us remember the path of technology funds - the big 1990s returns, followed by the big letdown.
But after three years of huge losses, technology mutual funds are back. As of July 25, the average technology fund was up more than 30 percent for the year, according to fund-tracker Morningstar Inc. in Chicago. Some funds, such as those that specialize in Internet and semiconductor stocks, have gained more than 60 percent this year.
So, is it safe to jump into technology funds again?
Depends whom you ask. Some experts say tech stocks have already become overpriced. Others say the recent gains reflect prospects for real growth in this sector, if not this year, then in years to come.
Experts do agree, however, that people should not expect to recoup their losses of the past three years by investing heavily in tech funds now.
Instead of trying to catch the latest tech-stock wave, they say, investors should evaluate their goals, tolerance for risk, and time horizon, and then decide how these riskier funds fit into their overall portfolios.
"No one should ever invest in stocks, including technology stocks, with money they're going to need in the next five years," says Mark Sellers, an analyst at Morningstar.
Mr. Sellers believes much of the fuel for the today's tech-stock boom is coming from cash that has been held out of the stock market for the past two or three years.
"I think about 28 percent of investors' portfolios are in cash right now, on average," he says. "That's a huge percentage, compared with historical numbers."
He cautions, however, that investors, in general, have had a long history of using built-up cash to chase funds with the biggest returns.
"When something has already gone up, they put money into it," he says. "By that time, it's the end of the rally."
As to whether this rally is based on real prospects for tech firms, Sellers doesn't think so. In his view, tech-stock prices are too high, relative to the companies' earnings or growth prospects. "The valuations in tech have gotten completely divorced from expectations and future cash flows," he says.
But some analysts believe there is substance behind the tech rebound. Many companies, not just technology companies, are benefiting from recent tax changes and low interest rates, says Michael Mahoney, managing director of EGM Capital, a hedge fund in San Francisco that focuses on technology, telecommunications, and media companies.
"With the combination of tax cuts and monetary stimulus, you have this enormous amount of stimulus that's been poured into the economy," Mr. Mahoney says.
While it may take time for all technology sectors to benefit, he adds, some, including the semiconductor, Internet, and computer-networking industries, are doing well. In semiconductors, for example, Intel Corp., recently reported second-quarter earnings that beat expectations, thanks in part to strong sales of its more profitable chips for personal and laptop computers. The back-to-school season helps laptop sales, too, Mahoney notes.
He also sees good long-term prospects for some Internet stocks and funds that specialize in them. The huge run-up in Internet stocks from 1997 and into 2000 became a classic bubble waiting to burst, he notes. But today's top Internet firms are making real money and real profits.
"I do think the growth and revenues we're seeing in some of the Internet names are for real," Mahoney says. In the past year, the stock of eBay Inc. has nearly doubled, while Yahoo! Inc. has almost tripled.
Christopher McHugh, a portfolio manager with Turner Investment Partners in Berwyn, Pa., also thinks prices of semiconductor stocks have room to move up. Mr. McHugh's firm manages the Vanguard Growth Equity Fund, which has about 20 percent of its assets in technology stocks.
"Right now, we're focused on semiconductors and semiconductor equipment," he says. "I also think you're finally going to see a PC [personal computer] recovery." Such a recovery would particularly benefit companies like Intel and Dell Computer. Both companies have market- leading products, McHugh notes, but they also have had the financial resources to spend on research and development during the recent downturn.
For now, a major question overhanging technology companies is corporate spending. Will these companies' customers - especially their corporate customers - boost spending on technology enough over the rest of this year and next year to justify tech stocks' higher prices? McHugh thinks they will, particularly if interest rates remain at or close to their current levels, and the economy continues to grow - even if growth is slow.
"Tech spending hasn't been that great this year," he acknowledges. "But I think if you look carefully at the trends that are developing, whether it's cellular, whether it's PCs, whether it's semiconductors, I think 2004 is going to be a much better spending environment for technology companies in general."