Murphy's Law for Value
The hard part about investing in technology stocks is finding the right company at the right price.
It's not easy in any industry, but in technology, where today's hot tip can be tomorrow's hot potato, people need all the help they can get.
Tech analyst Michael Murphy likes to focus on a company's spending for research and development (R&D), the seedbed of future earnings.
This adds a new twist to Wall Street's eagerness for earnings.
Consider Integrated Device Technology, which makes computer chips. Analysts see profits near 50 cents a share in the year ending March 1999. With a share price of about $14 (28 times earnings), the stock looks pricey.
But Murphy adds $1.90 of R&D to those earnings to come up with what he calls a "growth flow" figure, for Integrated, $2.40 per share.
At $14, the stock sells for six times "growth flow," versus a more typical 10 times for many hi-tech stocks. Not a sure-fire bargain, but it does suggest this stock might not be as expensive as its current price suggests.
At Integrated Device, Murphy sees promise in a new chip that runs cheap (under $1,000) personal computers.
So watch R&D. But also watch out if you don't see earnings, Murphy says, or if annual sales aren't rising at a nice clip.