Audray McMillian has become wired into tech stocks. After watching share prices for myriad issues soar to phenomenal highs, he just couldn’t resist expanding his holdings in these companies. “Tech shares offer some of the best opportunities around,” he asserts. “You can only imagine that there are millions of e-mails sent every day, and that as popular as computers are, there still isn’t one in every household or even classroom. To me that means the market for products like these has plenty of room to grow.”
With the help of his financial planner, the 36-year-old Houston real estate developer has reprogrammed his $150,000 retirement portfolio by purchasing large positions in tech stocks, including such notables as Compaq (NYSE: CPQ), the manufacturer that posted gains of roughly 200%, and Cisco Systems (Nasdaq: CSCO), a computer networking company that grew 143% by late December.
McMillian is among the growing number of investors who are seeking to cash in on the technology boom. From companies that provide access to the Internet to manufacturers of laptop computers, this sector represents the greatest force propelling the stock market today. We get sweaty palms at the mere mention of such companies as America Online (NYSE: AOL) and Amazon.com (Nasdaq: AMZN). And with good reason. Last year alone, AOL produced a mind-boggling 361% gain while Amazon. com was up a staggering 900%.
But technology has proven to be the most volatile of sectors. On January 6, the Dow cracked the 9500 level as stocks surged 233.78 points-the seventh largest point gain ever. The charge was led by tech stocks. A week later, on January 13, the market dropped 125.12 points, due to the devaluation of Brazil’s currency. such hot internet-related stocks as Amazon.com, Broadcast.com and eBay dropped 8%, 14% and 26%, respectively in one week.
So just how in the world do you figure out what makes these stocks move? To most of us, the talk of Internet protocols, software upgrades, wafer boards and next generations is enough to make us feel like Fred Flintstone hurled unceremoniously into the world of the Jetsons.
The simple fact is this: technology shares just aren’t measured like other stocks. Many software, hardware, semiconductor or Net shares don’t fit the neat understandable price-to-earnings (P/E) multiples that we’ve learned to use as a guide to making stock purchases. And shares aren’t cheap: AOL has a stock price about 280 times earnings, at a time when the Standard & Poor’s 500 fetches a P/E of only 20.
Investors are banking on future earnings growth and, as a result, have bid share prices to astronomical levels. But you can just as easily find sad tales of individuals who have bought a speculative issue and seen their investment evaporate at the first sign of crisis.
Still, the right mix of tech stocks will offer you highly charged returns. Even with the turbulence experienced in the market, the sector had a banner year in 1998. As of mid-December, in fact, the Pacific Stock Exchange Tech Index, the barometer for the technology sector,