Optical, semiconductor, storage, networking, biotech — where can the tech investor find shelter?
The correct answer would be none of the above sectors – and all of them. What it really comes down to is choosing a stock not for its sector and not for its leader, but because it is the right company.
In the ideal world, you want liquidity, you want momentum and you want growth. But technology is no different than any other sector – it is cyclical and leaders can quickly be displaced. Publicly traded companies change over time.
We may have thought the worst was reflected in current prices but, as last Friday’s sell-off showed, technology stocks continue to surprise even the most experienced investors.
Once again, we see technology stocks dragging the market lower following another round of earnings warnings from leaders in the sector and data that raised the presence of inflation despite the slowing economy.
In today’s market, uncertainty is feared the most and with all the confusing news, people have asked me whether the best place for the technology investor is on the sidelines. I don’t think so, but you have to understand why tech stocks are getting hammered so much.
Simply put, most tech stocks are growth stocks and they typically grow earnings very quickly. As a result, they tend to obtain a higher price tag in relation to the broader market when they are growing faster than the market.
However, as the sell-off in Nortel Networks (NT-TSE, NT-NYSE) showed, the change in a stock away from growth is the perfect recipe for disaster.
As you become a more experienced technology investor, you will come to learn that exceptions always exist and you can never know enough about a company or a sector. We only have to look back to last Thursday when Ciena (CIEN-NASDAQ) surprised on the upside and gave strong positive guidance for the balance of the year.
Ciena, like Nortel, competes in the optical networking area. But if you have done your homework, you will realize that Ciena makes its money on the short-haul metro market while Nortel makes its optical products for the long-haul market. These are two different markets with different client requirements and totally different market fundamentals.
There appears to be the perception today that the technology market is dead. I predict people will look back a year from now and realize that we have been presented with one of the best opportunities in history to invest in technology stocks. The key will be proper stock selection.
I am a firm believer in buying relatively small companies based on their potential of becoming a larger stock. What is great about these companies is that they are unknown.
If you do you homework and set realistic timelines for a return on your investment, big scores can be made. These small companies can continue to perform well while other, larger well-known names in a similar sector come under business and selling pressure.
In conclusion, we continue to see high-growth tech stocks that dominate market indices and investor mindshare can hurt investors. With news so readily available today, it is too easy to get tricked by the hype.
We have given you some hints in previous columns of what to look when you are reviewing an investment. Spend the time doing your homework or, better yet, work with an investment adviser to help you up the learning curve to successful technology investing.
One last thing — when a sector is the least favourable, that is when money can be made. Just remember how everyone around Calgary felt about oil and gas stocks one-and-a-half years ago?
(Brian Pow is a technology analyst and director of research with Acumen Capital Finance Partners Ltd. Topics discussed in this column are the view of the writer and do not necessarily reflect those of the company.)
