Share this story
Close X
Switch to Desktop Site

Reliability may determine survivors in high-tech race

The problem with high-tech stocks is innovation. Now, innovation is what high-tech companies - computer, telecommunications, gene-splicers, etc. - are all about.

But each innovation tends to send the buyers and sellers of high-tech stock into highs and lows. Apple Computer spurts ahead because of the innovative ''Lisa'' model. But soon rumors of IBM's ''Peanut'' model send Apple and other personal-computer stock tumbling, while IBM's stock climbs.

About these ads

Yet even though IBM is a machine and marketing powerhouse, Apple is not sitting idly by. Next year Apple is due to come out with a lower-cost model called ''Macintosh,'' which, some analysts figure, will make Apple a stock-market darling once again.

High-tech is exciting because of innovation. But, experts warn, don't forget that most of the guidelines for investing in more mundane companies also apply to high-tech firms. A well-managed company that has institutionalized product and market R&D is always going to be a better long-term buy than a company that relies only on a new idea - or a new wrinkle to a new idea.

During much of the summer, high-tech computer stocks have had a rough ride, even though personal computer sales are still strong. What has happened, market analysts say, is that investors have lost confidence in many of the smaller computermakers.

A recent report by the Connecticut-based International Resource Development market-research firm says ''bitter competition and kamikaze price wars are forecast in the portable and transportable computer markets.'' The report adds that within three years ''at least half of the current manufacturers of portables will be acquired, out of business, or in niche markets.''

That generally agrees with the perception of many Wall Streeters that the computer market is saturated, that room for innovation is marginal, and that old standby companies that can offer sales, service, and reliability are the ones that will dominate this maturing market.

''I suggest that in the next 12 months it's preferable to go with the elephants, not the mice,'' says Michael Geran, vice-president of research for E.F. Hutton. Noting there are more than 150 firms involved in the market, Geran recommends old standbys - IBM, Control Data Corporation, Sperry, NCR, and Honeywell. He adds that there are also a series of smaller companies such as Apple that remain ''attractive and not overvalued.''

The proliferation of computer outfits came about, he says, because of technological change and short product cycles, combined with the easy availability of venture capital. The shakeout is coming about, he says, because the industry ''elephants'' are using as competitive weapons their broad customer bases, their wide distribution capability, and their ability to solve system problems - and that is proving attractive to more conservative customers. Moreover, an improving US economy is prompting an increase in order rates as companies bring in data and word processors for expansion or to replace aging systems.

About these ads

What also has depressed the stocks of smaller high-tech companies is that people running these companies appear to be losing confidence. The Insider newsletter, which tracks buying and selling of company stock by executives who run those companies, has been noting a marked lack of enthusiasm among computer-company officials.

Out of 60 industry groups that Insider (Fort Lauderdale, Fla.) editor Norman Fosback monitors, the computer stock group is currently running 60th, with more selling by company executives than any other group. A related area, electronics, is running 58th.

Fosback attributes this to profit-taking in the computer industry, and he has his own view of high-tech: ''I think in microcomputers the vast majority of the companies are not really high-tech. Most manufacturers are little more than assemblers. The makers of disk drives, semiconductors, and CRTs are high-tech. But anybody can get into this business - cheap parts, software, and presto a computer system. Consequently, you now have enormous price competition.''

During the 13-month-old stock market rally, computer companies were among the fastest movers, and as a result their stock prices, says Mr. Fosback, ''got out of line with fundamental reality.'' A large number of microcomputer companies went public, he says, boasting of $50 million to $100 million in overnight revenues, but no real profits. Like International Resource Development and E. F. Hutton, Fosback sees a continued shakeout of smaller firms and consolidation.

With other companies that are more properly considered high-tech, he says, market problems are being experienced because they have little to back them up during a correction period, such as has occurred in the market since midsummer. The biotechnology group, for instance, as yet is in the development stage, with no underlying product base. Thus its stock is vulnerable in a downturn.

The computer group may be a good model for the biotechnology group. If and when biotechnology comes into its own as an industry, innovation will cause a few new Apple-type companies to emerge, but analysts point out in the long run the companies that can offer the most reliable products consistently will be the ''elephants'' of this industry. The California Technology Stock Letter puts it this way: ''It isn't the next product that matters, it's whether the company has a process for continually creating new products.''

Signs that the economic recovery was still in process - and that a credit crunch may be averted - caused the stock market to move ahead strongly during the middle of last week. News of violence in Lebanon and then of the Soviet downing of a South Korean jetliner apparently prompted a downturn toward the end of the week. But the overall healthy economic picture should determine the movement of the market past Labor Day.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.