Jewish World Review Sept. 5, 2001 / 16 Elul, 5761
James K. Glassman
Tech firms built to last through tough times
STOCK prices are about the future. More specifically, the price of a share of stock reflects investor belief in the future earnings of the company. Depending on how much the firm's earnings, or profits, are expected to increase over time, one share of the company will trade at a higher or lower multiple of its earnings.
So in this environment, with the future looking pretty bad for almost everyone in techland, it can seem almost impossible to evaluate potential investments. What's the right price for a company with weak earnings, or no earnings, or even losses? You can look at a company with falling earnings, plot out a bleak future and ultimate bankruptcy, and then assign a very low valuation to the company, but of course current earnings reports only reflect a moment in time. If the firm has a history of strong performance, then the current troubles may simply be the temporary result of a lagging economy. When the economy turns around, or when a specific market comes back to life, the conditions for the company are apt to change very rapidly.
For long-term investors then, it may be useful to focus on the particular strengths of the company, and not on the most recent quarterly report, the state of the economy, GDP growth, or Alan Greenspan. Forbes ASAP, the technology supplement to Forbes magazine, polled hundreds of securities analysts to come up with what the magazine calls, "The Dynamic 100." ASAP asked the analysts to rank the firms they cover in seven categories, described by Forbes' Eric Pfeiffer:
- Change: How well does the company respond to change?
- Opportunity: How big is the potential market for the company's products?
- Sell: How well does the company respond to its market opportunity?
- People: How strong is the company's human capital?
- Alliances: How strong are its partners and its relationships?
- Ramp: How fast is the company growing, and can it continue to ramp up quickly?
- Financials: How strong is the company's overall financial health?"
I believe these are the right questions, but why, you might ask, do we want to ask the opinions of securities analysts? Aren't they the conflicted hypesters who peddled so many dot-com dogs to us in a mad rush for investment banking business? Well, stock analysts at the big investment banks have been getting kicked around in the press lately, perhaps with good reason. But it's worth remembering that these analysts, no matter what axes they may be grinding for their firms, tend to know an awful lot about the companies they cover. In fact, a big reason that they've become notorious for bad calls is that journalists lean on them very heavily for information about companies and markets. The prominence of these analysts is largely the result of ignorance on the part of reporters who need jungle guides to interpret market moves.
And in this particular case, in which analysts are responding to a poll about certain qualities and which companies have them in abundance, I think the analysts may be a little more candid than they are when they have to make very public buy/sell recommendations on bank clients. Of course you should always keep in mind that analysts may have financial incentives behind their recommendations, but I think the results of this poll could be instructive. And if you're looking to devote a portion of your portfolio to shares in tech companies, I think you'd do well to divide the money among the highest ranking firms in several categories. Here are the most dynamic firms in several tech markets, according to Forbes ASAP:
Software: Mercury Interactive (Ticker symbol: MERQ)
Wireless/Telecommunications: Openwave Systems (OPWV)
Biotech: Genentech (DNA)
Network and Telecom: Sonus Networks (SONS)
Peripherals: Sanmina (SANM)
Not a bad group for the tech dollars in your
JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.
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