High-tech stocks: market analyst tells why he's bullish on them

For the "alert" investor, technology stocks offer an excellent opportunity for above-average returns, as these issues outperform both the market and the economy, a securities analyst familiar with the industry maintains.

The high-technology industries and their markets are growing much faster than US industry as a whole, contends Joseph Kapka, an assistant vice-president and analyst at Birr, Wilson & Co., a regional securities firm here.

This predicted growth will be nudged along by the cost reductions, new markets, and new applications made possible by advances in this technology, he holds.

Mr. Kapka argues that technology stocks benefit from important trends under way on the industrial scene. Among them are improved productivity through automation of manufacturing and making the move to modernize American industry a national priority through advanced technology.

Other factors supporting Mr. Kapka's view include the need to make the most of US technology in world markets to meet foreign competition, the longer-term outlook for stepped-up US defense spending, and efficient energy utilization as a vital national objective.

But investors should weigh the risk-reward factor in picking stocks from this group, he cautions. "Riskier stocks may have higher returns, but the potential for losses can also be greater," he points out.

Mr. Kapka further recommends diversifying by buying different stocks in different technology industries -- semiconductors, computer hardware, computer software and services, telecommunications, and instrumentation.

He also urges "prudent" investors to consider overall and individual prices when making purchases or sales. As a group, the technology stocks tend to be very volatile, and their market movements are amplified.

"The investor should try to do his buying when these stocks are at relatively low price/earning ratios," he suggests. "Over the past few years, the average P/E ratio of technology stocks seems to have fluctuated between 11 and 20 times, trailing 12- month earnings."

He advises investors to be aware of the potential effect of overall economic activity on the various segments of technology companies. "Semiconductor companies provide good examples. They are suppliers of components and their fortunes tend to be coincident with the economy," he notes.

Hardware companies that provide systems to "end users" are affected later in the economic cycle, and their sales tend to be related to capital investment. "The lag time here is from 6 to 18 months, depending on the nature of the system and the size of the expenditure. The timing of the impact on small computer systems would fall toward the low end of the range," Mr. Kapka says.

Mainframe computers and large communications systems, as well as some instruments, would tend to lag by a longer period. Companies that sell directly to end users would also probably see a smaller effect on their sales than component makers, but the slowdown might last longer.

"The computer services industry deserves special consideration because of its uniqueness," he adds. "This group should hold up well during economic hard times because of the critical nature of software and the peculiarities of the market for these services."

Several issues should be purchased, though, because the industry is still in its infancy and individual stocks may demonstrate unusual volatility, he says.

Mr. Kapka's recommended list of technology issues includes: Advanced Micro Devices, Applied Data Research, Applied Materials, Digital Equipment, Finnigan Corporation, GenRad Inc., Hewlett-Packard, Informatics, and Intel.

Rounding out his roster of favorites are IBM, Management Assistance, Mathematics, Motorola, Paradyne Corporation, Plantronics, Rolm Corporation, Tandem Computers, Triad Systems, an d Tymshare.