Tech Stocks Still in Charge, Despite Dow's Dip

After a springtime lull, technology shares have again stepped into lead Wall Street to new highs, and many analysts remain optimistic about the surge.

Technology shares, in fact, are starting to outperform the broader market.

While the Dow Jones Industrial Average was flat for the week, after slumping 130 points Friday, the technology-laden Nasdax index rose 3 percent.

Computer giant, and Dow component, IBM even bucked Friday's fumble, rising almost 5 percent that day alone to 104 1/2. Investment house Merrill Lynch has set a new price target for IBM shares at 150.

Other big high-tech stocks such as Intel, Texas Instruments ,and Microsoft show sharp gains this summer, and smaller tech stocks are starting to suit-up for the big game.

Some of the lesser-known technology indexes are finally showing upward momentum. The Morgan Stanley High Tech Index is up 26 percent this year. The Pacific Stock Exchange Technology Index is now up more than 12 percent since June.

Gene Jay Seagle, head of Tactics and Technics, a market consulting firm in Weston, Conn., notes two factors:

* Solid earnings from the big technology companies, such as Compaq Computer, Lucent Technologies, and, last week, Intel. That attracts attention to lesser- known high-tech firms, he says.

"Mutual fund managers are sitting on massive hoards of cash inflows," Mr. Seagle says. As a result "you're going to be seeing a lot of buying of high technology stocks on perceived weaknesses within that market."

* A change in perception. Clearly, says Seagle, Lucent and Texas Instruments qualify as high tech. But increasingly, he says, so do GTE, General Electric, and General Motors, since they work at the cutting edge of innovation.

Seagle, for his part, likes GE, GM, and United Aircraft. These firms combine the strengths of both the high-tech sector and blue-chip stocks, he says.

"In the early part of this year, a number of companies turned in low peformance numbers relative to the rest of the market" because of stuctural changes or transitions in their product lines, says Tom Thornhill, head of technology research at Montgomery Securities, San Francisco.

Now, such companies as Cisco Systems and Intel, are back on track, with accelerating growth rates, he says. Mr. Thornhill expects continued gains in profits for many big tech firms, which could translate into higher stock prices.

Thornhill particularly likes Intel, Texas Instruments, and Bay Networks.

Still, the question persists: Will smaller high-tech firms share in the glory? To date their advance has been sluggish, mirroring a stupor in the overall market for small and mid-sized companies.

The Russell 2000 index, for example, which covers many smaller companies, including those in technology, is up a tepid 5.5 percent this year.

But it did outpace the broader market indexes last week. Thornhill believes that as stock prices rise for larger high tech firms, smaller companies will look more attractive.

David Sterman, associate director of market research for Individual Investor magazine, says investors would make a mistake in overlooking some unknown, but innovative, firms.

He especially likes Pairgain (Pair), Larscom (Lars), Transcrypt (TRII), Jetform (FORMF) and Stratasys (SSYS), all found on the Nasdaq market.

When researching technology stocks, he says, "look for something slightly offbeat," such as smaller companies linked to the big ones.

In the communications sector, for example, find firms that provide goods or services to cellular phone producers or long-distance telephone companies.

He also favors companies gearing for the 21st century, such as those in communications, imaging, and computer graphics.

Within those groups, his focus is on innovative firms that may now be slightly out of favor.