Consistent growth from blue chip stock over a period of time is almost impossible, says US-based Alliance Capital vice-chairman Al Harrison.
Consistent growth from blue chip stock over a period of time is almost impossible, says US-based Alliance Capital vice-chairman Al Harrison.
“Only 11 per cent of companies (in the US) have achieved 10 per cent earning per share growth over the last 10 years,” he says. No companies recorded 25 per cent EPS over the same period.
Speaking at a Melbourne FPA chapter lunch, Harrison says the reason why it is hard for companies to maintain growth is the changing business climate.
During the period 1994-1998, companies like America Online, Dell Computer, MCI Worldcom and Microsoft have joined the S & P 500 Index. During that period, industrial and resources companies like Amoco, Chrysler, McDonnell Douglas and Nynex have left.
“Technology is now a big part of the US market and a lot of historical sectors have less impact than they did,” he says.
This growth in technology stocks is driven by consumer demand. Research by Alliance has found IT spending is now 9 per cent of US GDP.
Despite demand, investing in technology stocks is not easy, Harrison says.
“Technology is a dangerous animal to deal with as many of the early technology stocks have now fallen by the wayside,” he says.
“When we look at technology stocks today, we should look at the failures of the past.”
The failures were companies like Xerox, Sperry Rand and Mohawk Data that didn’t get the minicomputer markets right in the 1970s. In the 1980s, IBM, Wang, Digital and Cray missed out on the PC boom. Losers in the 1990s have included Apple, Lotus, Netscape, Novell and Silcon Graphics.
Stocks that were winners were IBM, Xerox and Sperry Rand in the 1960s when mainframes ruled; Digital, Hewlett Packard, Texas Instruments and Wang with minicomputers in the 1970s and Apple, Compaq, Intel and Microsoft with PCs in the 1980s. Amazon, America Online, Intel, Nokia and Yahoo have been the recent winners with the growth in Internet and communications.
Harrison says there are still opportunities for the right technology stocks. In countries like the US, Mexico and Australia, the penetration of PCs is 400 per 1000 head of population. In the rest of the world, excluding Europe and Japan, the PC penetration is two or less per 1000 population. The total population for this area of the potential market is 3.2 billion.
“Technology is a great area to invest, but there are a lot of dangerous stocks,” Harrison says.
For the future, he believes technology stocks prices will move sideways and this will allow areas like small caps, manufacturinng and retailing to catch up.
