Playing the Tech Game

Know when to buy, sell, hold or fold new-economy stocks

in bonds and 5% in cash.

Cash 5%
Equities 95%
Aggressive: For those who can stomach it, this portfolio has 95% in equities (broken down as 40% telecommunications, 30% Internet technology and 25% pure business-to-business Internet plays) and 5% in cash.

THAT WAS THEN, THIS IS NOW
What’s it really like to shop for a stock today? Here’s a rundown of the major valuation indicators, and how they function in the old vs. new economies:

PRICE-to-EARNINGS (P/E) RATIO
THEN: This was a relatively easy way to value a stock. In a nutshell, the higher the P/E, the more you’re paying for shares. Under 20 was considered a bargain, and you could always compare the number with others in its class, or against the S&P 500.

NOW: Since many Internet companies have yet to make a profit, P/Es are spinning into space. In fact, most analysts have thrown out the P/E when considering an Internet stock. You’re not paying for earnings, but for potential earnings. For example, as of mid-March, Wal-Mart’s P/E was 45.5. Cisco Systems? 196.2.

PRICE-TO-BOOK RATIO
THEN: Price-to-book, or assets minus liabilities, is a snapshot of financial health. The higher the number, the more you’re paying for fewer assets. However, it makes a lot more sense to consider price-to-book when you look at an “old-fashioned” company, such as Wal-Mart, because you can factor in physical assets such as warehouses, stores and trucks.

NOW: Many dotcoms are simply offices with Internet hook-ups-with many more liabilities than assets. This makes price-to-book look almost as crazy as P/E. Wal-Mart’s price-to-book, as of mid-March, was 10.4; Amazon.com’s was 58.5.

PRICE-TO-SALES
THEN: Price-to-sales is a traditional value stock screen that takes the current market cap of a company and divides it by the last 12 months of trailing revenues. The caveat is that some industries typically sport lower price-to-sales than others, so it doesn’t always provide an accurate picture.

NOW: Because it’s based on sales, meaning the revenues a company generates from its products vs. overall earnings, price-to-sales can help value a company that is relatively new in a high-growth industry and/or earnings-depressed in the short term. Again, you can apply this indicator to Internet companies that have yet to turn a profit: Wal-Mart’s price-to-sales was 1.5 as of mid-March, Amazon.com’s was 14.4.

REVENUE GROWTH
THEN: Revenue, which is simply how much money a company brings in from its products or services, was, on the whole, less important than earnings growth (read: profit). Why? Because often there was a cap on how much a company could grow, and at some point it would have to increase earnings by producing more efficiently.

NOW: Today? Many dotcom companies are spending money for name recognition and customer loyalty. (Again, think Amazon.com.) So profits are less important (right now) than generating increasing revenue. (Some experts rely on the number of hits a site gets a day as an indicator of consumer loyalty.)

CASH FLOW
THEN: Free cash flow, a company’s accessible cash, has long been an indicator of smart business. It makes sense. If a company’s flush with reserves and using its leftover cash wisely,

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