lot of these tech companies are going to fuel earnings is by accelerating the top line.”
FOLLOW THE LEADERS
If you’re like many investors, you’re probably salivating over the prospects of investing in some hot internet stock.
In January, a number of such companies-namely, Amazon.com, Yahoo! and E*Trade-either announced or considered stock splits to make their shares more affordable
to individual investors. This action, in turn, further bid up prices for these companies. One caveat: these stocks, many of which are not backed up by solid earnings growth, will be the first to be hit in a market rout. So don’t be surprised if your investment takes periodic dips.
We suggest that you stick to companies that dominate their industries. New issues such as Net stocks have produced amazing returns, but can drop just as quickly. For cautious long-term investors, the best course is to purchase shares of the tried and true. Such examples include Intel, the mammoth semiconductor manufacturer that controls roughly 90% of the market, or a giant like Microsoft, which has a virtual stranglehold on operating software for personal computers. When the market dropped after the Brazilian currency devaluation, these two stocks proved to be among the most resilient.
Start with the fact that the monoliths usually push the direction of their market, and maintain deep-rooted customer relationships. Moreover, they have the ability to fend off or acquire smaller competitors. Money managers like American Express’ Manns will buy these concerns even though the P/E multiple is higher than the growth rate. Over time, he believes the value of shares will surge as these concerns merge with other entities.
In an era when today’s tech darlings can turn into dogs overnight, the leaders provide you with stability because of their
staying power. This will become very important if the stock market has the same volatility that it displayed in 1998.
So, which companies are the stars of the tech sector? Below, we have identified the best buys in each segment and the reasons you may want to invest in these issues. They include the following:
Leader: America Online (nyse: aol) Honorable Mention: MCI-Worldcom (nasdaq: wcom)
Internet stocks have been some of the hottest shares around in 1998. The reason: the World Wide Web looks to be as much a communications breakthrough as the telephone. In fact, it’s estimated that online traffic is doubling every three months.
The explosion of the Internet has certainly taken the stock market by storm. It’s hard to gauge the overall impact; S&P doesn’t chart the group by an index, but instead lumps it together with computer software and services. Nonetheless, that group, which includes Net stocks, had risen almost 65% in 1998.
Without a doubt, the group leader is AOL, the No. 1 Internet access provider.
The company’s profits are currently in the black, and analysts predict it will grow earnings at an average 48% annually over the next five years. At press time, all 32 Wall Street analysts who cover the stock rated it a “buy.”
Another way to play the boom of the Internet