Technology stocks weather the storm

While the gloss has been wiped off technology the market still has potential for careful investors while look at the weather report for the sector says the fundamentals still apply.

After a strong start to the year, the technology sector has struggled in recent months. From the end of 1999 until early March 2000, the technology biased NASDAQ Index rose 24%. The US economy was booming, the global economy was strong and the earnings outlook for technology companies was positive.

In February and March, interest rates were lifted in both the United States and Europe suggesting that the previous period of exceptional earnings growth might be over. Investors reacted swiftly, selling stocks and creating what has become know as the 'tech wreck'. From early March to early October the NASDAQ fell 39% with some companies falling over 50%.

While the poor performance of the technology and communications companies in recent months is disappointing, investors, and their advisers, should not lose sight of the potential of these investments.

The technology and communications industries are continuing to drive changes in the global economy on a scale not seen since the industrial revolution.

These changes are generating tremendous economic value through improvements in the availability of information and the speed and ease of communications. Selected companies will continue to experience profitability and earnings growth well above that of the overall global equity market.

Individual stock selection is important for any fund but even more so recently in the technology and communications sector where there has been a large amount of hype around different companies and concepts. As a result of this and combined with the rapid pace of change in this sector, fundamental analysis becomes vital.

Many of the companies in the technology and communications industries are operating in an environment where the price they can charge for their product or service is falling continually. This creates competitive pressure from which only selected companies will emerge.

Colonial First State head of investment markets research Hans Kunnen says it is through research fund managers have identified and invested in companies that have outperformed the sector while the equity market in technology and telecommunications companies has remained volatile.

Some of these companies which have continued to perform well, according to Kunnen and the Colonial equities research team, are:

Phone.com- this company holds a leading market share with wireless service providers, with over seventy customers that between them have subscribers representing over 50% of the global wireless market. With the pending merger with Software.com, Phone.com has the opportunity to broaden its product suite to include messaging software and expand its customer base to include internet service providers (ISP's) and cable companies in addition to wireless and wireline service providers. On this basis its earnings are set to grow rapidly.

Ariba- with its early mover advantage and market penetration, Ariba has attracted positive market attention. Ariba is intimately involved in the growth of B2B eCommerce and is well positioned to benefit from the growth of on-line exchanges and direct goods procurement. The company has an attractive and scalable business model with multiple revenue sources and its recurring revenue streams

NB. These are not stock recommendations.

Companies which have also attracted attention:

Turnstone systems- is the leader in the market for digital loop management systems, which is the equipment and software that enables network operators to eliminate costly manual processes associated with provisioning, maintaining and managing digital subscriber line (DSL) services. The growth outlook for equipment that enables high-speed internet access to homes and businesses (often referred to as "broadband") is exciting.

Tut System- dominates the market in DSL equipment for apartments and hotels. Using Tut equipment in the base of a building, a carrier can deliver a high quality broadband service at the same time as overcoming the main limitation of DSL technology, which is the limited distance it can carry data from the carrier's central office.

Sanmina- is one of the world's leading contract manufacturers. This company benefits from the very powerful trend of large scale integrated technology companies continuing to outsource more and more of their manufacturing and assembly processes. Sanmina, with 70% of revenues derived from the telecommunications industry, sits squarely in the middle of two of the most powerful trends in technology today - outsourcing and the construction of global telecommunications infrastructure.

Biotechnology stocks have not been hit with the same disease affecting technology stocks over the past six months, according to a Deloitte Touche Tohmatsu survey.

In fact Deloitte says biotech stocks were "the flavour of the month" in the last quarter, as investors tried to find another CSL.

The latest Deloitte Biotech Index, released today, found commercial interest in Australia's biotech sector had rebounded after a plunge in its stockmarket fortunes six months ago.

Indicative of the level of interest was that 13 new biotech companies have listed, or are about to list, on the Australian Stock Exchange since July.

"Certainly it's the flavour of the month or the flavour of the last three months," says Deloitte Life Sciences partner Glen Sanford. "There hasn't been the same number of listings in other sectors."

Deloitte Life Sciences client director David Black says the profile of the biotech sector has risen over the last 12 to 18 months, helped by news from the US about the strength of the sector and the success of CSL in Australia.

"Nobody wants to miss out on the next CSL, if you can double your money in a year you're doing well," Black says. CSL shares have more than doubled in the past year to around $34.70 when the latest index was calculated.

Sanford says the latest Deloitte Biotech Index shows Australian biotech stocks have not been significantly affected by the tech stock correction in April.

"Despite the upheaval of stocks witnessed in the third Deloitte Biotech Index released in July, existing biotechnology stocks have steadied and new entrants have flocked to the market to capitalise on investor interest.

"Biotechnology stocks have continued to attract investors, often at the expense of other technology stocks."

At September 29, the market capitalisation of the index's 47 ASX-listed stocks had reached $11.89 billion, a 32.5 per cent increase on the figure at June 16.

Sanford says the Deloitte Biotech Index continued to outperform the ASX all ordinaries index with drug and blood product company CSL again powering much of the growth in the sector.

The Deloitte index rose 7.8 per cent in the three months to September 29, but actually fell 1.5 per cent if CSL was excluded.

Sanford says the index has since dipped slightly, falling 3.1 per cent between September 29 and October 20, however, the index still showed a healthy rise of 4.5 per cent for the period June 30 to October 20.

Black says a large number of recent and upcoming biotech listings have share options attached.

"In the recent listings of floats which have come to market over the past three months, we have noticed an increasing number of companies are offering share options to potential investors," he said.

"The increase in the availability of options enables investors to benefit from any future upside in biotechnology shares without spending large amounts today.

"The popularity of options clearly indicates investors expect biotechnology share prices to rise."