The bull market has been very kind to young high-technology stocks. Some of them have trebled or quadrupled in price since the market's surge began in mid-August.
Now, Barton Biggs, director of research at Morgan Stanley & Co., has warned his firm's blue chip clients that he expects the stocks to ''take a serious tumble'' over the next three months.
Mr. Biggs, who is widely respected among institutions that receive the investment banking firm's research, says that he expects ''the damage to be particularly severe in the smaller, more speculative, lower-quality issues.''
Although he doesn't have any particular time frame in mind, he notes that in a bull market, the correction in the stocks will probably be ''later rather than sooner.'' Thus, ''braving the wrath of the technological cognoscenti,'' he recommended last week that the firm's customers gradually sell off their low-quality, unseasoned technology stocks, look closely at their current holdings of quality high-stocks, and cast ''a profoundly jaundiced eye on any new additions, no matter how appealing the story.''
Mr. Biggs reaches his conclusion about stocks through observation and inference. He doesn't pore over batteries of statistics, but molds them around his thesis.
With small high-technology stocks, he reasons that competition in this area is increasing dramatically. In the mid-'70s only some $20 million of venture capital went into such investments annually. This year, investors will shovel $1 .5 billion of venture capital into high technology.
While these investments are bullish for the country - increasing productivity as well as creating new jobs - they also have a negative impact. For example, Mr. Biggs believes product life is shortened, and companies can no longer claim ''proprietary positions as technology becomes a commodity.'' He says this shift is a ''very negative development for existing single- or limited-product-line companies.''
In addition, the management of many of these companies is unseasoned, and many will not survive in the competitive environment. Biggs notes that Venture Capital Journal found that among 61 new venture-capital firms which were founded in the past five years to invest in high technology, 53 percent of the general partners had five years' experience or less in venture capital and 21 percent had no such experience at all. Biggs says Venture Capital Journal maintains that general partners should have been active for at least seven years - representing a full investment cycle.
Rather tongue in cheek, Biggs adds, ''It does seem as though half of the male population of the suburb I live in - Greenwich, Connecticut - has now migrated either into venture capital, risk arbitrage, or leverage buyouts. With all due respect for my fellow citizens' abilities, I doubt the gains they so confidently chatter about will be realized.''
Biggs finds that competition among some high-tech firms has finally started to eat into profits. As they actively bid for personnel, expenses rise. Thus, he reckons, earnings will not rise for these firms as rapidly as investors expect them to.
Finally, the stocks have risen to the point where they are close to being fully valued. The price-to-earnings ratio of the T. Rowe Price New Horizons Fund , which Morgan Stanley's emerging-growth-stock analyst uses as an index of such stocks, is selling at 1.8 times the multiple of the Standard & Poor's 500 stock index. Historically, Biggs says, emerging growth stocks have been ripe for selling when the multiple got up to around twice the S&P average.
This is not to say Biggs is totally down on emerging technology stocks. If you can find the right one, he agrees, ''there is no more explosive investment in the world.'' But if you don't find it, the penalties will be higher now, he says.
He remains optimistic about the less speculative high-quality stocks. He has been a supporter of investing in IBM and consumer growth stocks.