Cashing in on TECH STOCKS

They may have tremendous potential, but how do you tell the difference between a sure thing and a pipe dream?

was up 40%, outpacing the 18% return for the S&P 500.

You can find a way, however, to plug into tech stocks and produce maximum gain with minimal risk. be suggests that you take a long-term view: Find those that have withstood the test of time as you create a sound investment portfolio.
We talked to a group of experts to let you know the best method to sniff out winners. First, you need to figure out how to value technology stocks. For most companies, you examine the earnings per share, the manner in which Wall Street divvies up a company’s profits to shareholders. After assessing how quickly or slowly earnings are growing, you then compare the company with the broad market by looking at the P/E multiples-the share price divided by its earnings per share. To gauge whether the stock is indeed a bargain, you’d compare that figure with the P/E of the S&P 500 or Dow Jones Industrials.

Portfolio managers use the same yardstick for tech issues, but differently. Since investment pros have found that tech companies can grow earnings faster than retailers, financial services firms or industrial companies, their shares stand a greater chance of appreciating over time. Because of that ability to increase value, tech shares are allotted a higher multiple in the market.

A good example is Cisco Systems. Wall Street analysts believe that the computer networking company is slated to increase earnings at close to a 30% clip over the next five years, according to Zacks Investment Research. That figure significantly dwarfs the S&P’s projected earnings growth rate of 7% over the same period. Since Cisco’s shares will stay in high demand, the company’s shares trade at a P/E of 75 instead of 22, the market average. Because of this factor, money managers tend to use P/E multiples to differentiate stocks in the same industry since they face similar competitive challenges.

To figure out how much a company’s projected growth is worth, money managers use a tech company’s P/E multiple and measure it against its projected growth rate. According to Michael T. Manns, a senior portfolio manager who oversees $800 million in institutional funds for American Express Asset Management, a technology stock looks more attractive as long as the P/E is no more than 1.5 times its growth rate. If the stock is above that figure, then chances are the stock’s price is too high. Below that point, you’ve snagged a bargain.

One final barometer is the price-to-sales ratio. To figure this measure, you multiply a company’s stock price by the number of shares, and then divide the figure by its sales. This technique-used chiefly to gauge competitors within the same industry-has been applied to evaluating emerging firms that remain a major force in their industry but have yet to produce a earnings stream. In this case, money managers believe that sales are a good indication of what’s to come. C. Kim Goodwin, portfolio manager for the $6.6 billion American Century Growth Fund, maintains that “the way a

Pages: 1 2 3 4 5 6