Biotech gains, overseas mergers should lead to an uptick for tech

It seemed like a wrecking crew rampaged through the canyons of the Nasdaq technology sector during the past three months, causing havoc at scores of once proud - and high-flying - firms.

For the first half of 2000, science-and-technology funds barely held their own, eking out a miniscule gain of 4.1 percent - compared with a gain of 36 percent for the same period last year, according to information firm Lipper, Inc.

But that's just part of the story. The average Nasdaq stock is now down a whopping 44 percent, says Anthony Dwyer, chief market strategist for financial firm Kirlin Securities, in New York.

Moreover, the sector continues to be battered by uncertainty about about the direction of interest rates and slowing profits, Mr. Dwyer says. A new report by Wall Street investment house Salomon Smith Barney, forecasting weakening demand for computer chips, has also sent negative tremors through the high-tech arena.

Still, don't count technology out, most experts agree. Selectivity is now more important than ever.

Indeed, health and biotechnology funds continue to outperform the broader market, in part reflecting a steady introduction of exotic new products - not to mention the mapping of the human genome.

The health/biotech sector shot up almost 38 percent for the first half of 2000, compared to a loss of around 1 percent in the first half of 1999, according to Lipper.

Also, conventional technology firms, including cellular companies and telecom firms, should post solid gains in the months ahead as investors see a slower, moderating economy, says Dwyer.

"Fundamentals remain sound," he says. Global companies continue their drive to boost productivity and profits through modernization and computerization.

Dwyer likes telecommunications-equipment firms, cellular-technology firms, and what he calls the "broad" technology market.

But Internet-linked firms - the dotcom companies - will remain a cloud on the technology sector, he says, given their substantial operating costs and uncertain earnings prospects.

"What has happened is that capital markets provided heavy financing" to many fledgling dotcom companies, says Charles Kadlec, managing director of mutual-fund firm J.&W. Seligman in New York. "In part, that occurred because there were no clear business models about how a dotcom company should operate," he says. Now, as investment bankers learn more about these firms - including their inability to post earnings - capital investments are slowing, or being stopped.

That stoppage contributed to the selloffs of dotcom stocks by individual and institutional investors in the past few months, Mr. Kadlec says.

"Capital markets are very good at cutting off losers," he says.

Not surprisingly, mutual funds that invested heavily in the go-go dotcoms as well as traditional tech firms were pummeled during the second quarter. Perhaps the hardest hit family of funds was the Janus Group, which had been scooping up investment dollars in the first quarter. Some five Janus stock funds, one-third of its total roster of stock funds, posted negative returns by June 30.

Still, as it becomes clearer that inflation is being contained, investors should see steady improvements in revenue and earnings streams for most high-tech firms, excluding dotcoms.

"I expect to see the Nasdaq index close out the year 2000 in positive territory," says Dwyer.

"Many tech companies in general are going to show outsized earnings gains in the months ahead," says Stephen Dalton, who tracks technology for First Union Bank, Philadelphia. He expects at least two strong waves of earnings growth for tech: through July, and then again, from September through the November presidential election.

One area where technology should grow steadily is among overseas firms, says Steve Werber, who co-manages the Seligman Global Technology Fund.

In addition to expanding within their home countries, European firms are now entering into cross-border mergers. Mr. Werber also sees strong technology plays in both China and Latin America.

Still, Werber cautions that buying into a global technology fund should be a long-term proposition.

His fund, for example, which was up more than 100 percent in spring, is now just holding its own, closing up around 0.3 percent through July 5.

Many technology issues remain unresolved in Europe, Werber says, including the ability of wireless firms to provide data transmissions.

(c) Copyright 2000. The Christian Science Publishing Society