Scouring the tech wreck for long-term promise

The downdraft that has punished the US stock market in general - and technology stocks in particular - is still sweeping through Wall Street.

For the world of technology stocks, including dotcoms, there is still no consensus view that the time to start buying tech stocks - or technology-oriented mutual funds - is yet at hand.

But experts do agree that tech should not be considered a no-go sector, as long as stock-buyers stay selective.

The question is: where to look?

High-tech remains in the doldrums overall, and far from turning the corner.

Web-based firms still standing after the recent round of shakeouts appear to be the hardest hit, not surprisingly, in terms of support from stock analysts.

"I can't think of one dotcom or e-commerce publicly traded company I could recommend at this time," says Larry Wachtel, a vice president with investment house Prudential Securities Inc., in New York. "Over 500 of these types of firms have disappeared" during the past year, he says.

"Most important, the entire rationale of the dotcom, e-commerce companies has proven to be wrong," says Mr. Wachtel. "Their argument was that the world had changed, that bricks and mortar didn't count in terms of creating or selling products, that everything was going to take place on the Internet."

Well, "the Amazon.com view of technology and commerce" has turned out not to be the wave of the future, he adds - at least, not yet.

Ralph Acampora, Prudential's longtime market technical analyst, does not yet see support levels firming up behind the technology sector. His advice: Be wary of tech stocks and cherry pick selected issues at this time.

The Nasdaq stock market, which includes most technology issues, hit an all-time high March 10, 2000. Since then, all major tech sectors - including semiconductors, software, computers, and telecom - have fallen, although a number of subsectors have started back up this year.

But since more than a year has passed, many investors ask, is it time to recommit to technology?

"No, no, no, it is not time to start investing in the technology sector again," says Stephen Dalton, CEO of ForeFront Capital Advisors, in Philadelphia.

Fundamentals, such as the need for new corporate capital-development projects, as well as sharply accelerated consumer purchases, do not yet support a resurgence of the tech sector, he says.

Looking down the road, however, Mr. Dalton believes that fundamentals will improve during the second half of this year, which should lead to a renewal for the industry and selected companies in 2002 and 2003.

In addition, says Dalton, Europe, which is facing current market and economic weaknesses of its own, will begin to grow next year, boosting the US tech sector.

For now, most indexes of technology issues continue to head south. Granted, the Dow Jones Internet Commerce Index is up a tad this year, about 1 percent through June 15. But the Dow Jones Internet Services Index is down about 43 percent.

Mutual-fund performance indexes are also staying down. According to information firm Morningstar Inc., in Chicago, the 52-fund Internet sector is down roughly 30 percent through June 18. For the past five years, it's up only 13 percent - but only 5 of the funds have been around for that long.

Technology funds in general, including e-commerce and dotcoms, are down 32 percent through June 18. For the past year, they are down 55 percent. That compares with a drop of 8 percent for the Standard & Poor's 500 Index, and a decline of 17 percent for the past year.

Still, some analysts find areas for potential gain:

* A few large companies, Microsoft and IBM, look promising, says Dalton, given their financial strength and carefully honed management plans. Standard & Poor's Corporation also recommends IBM.

* The semiconductor/equipmentmakers: "We think they are near a cyclical market bottom," which means they should be ready for gains in the next year, says Joe Tigue, managing editor of the Outlook, an analytical review published by Standard & Poor's Corporation. Firms often cited in this category, but not specifically recommended by S&P, include Applied Materials and Novellus.

* Selected software firms: This subsector would include such firms as Computer Associates, says Wachtel.

Still, when it comes to Internet firms, most analysts are hedging their bets. Even in the case of major equipment, semiconductor, and computer firms, "you have to work your way through huge inventories," says Wachtel.

Most of these firms had large supplies of products on hand when the market went into freefall more than a year ago. So if you buy into a tech company, you "are really buying for future, not current, gains," he says.

(c) Copyright 2001. The Christian Science Monitor