Tech stocks: Sector too big to ignore

"The principal risk in the sector lies in the over-valuation. This arises in many instances from the unproven and uncertain nature of the companies' products, services and operations as well as the long forecast horizon," Ords say.

"A lot can change in the sector in one month - let alone 10 to 20 years."

"The most common cause of over-valuation is however excessive optimism by investors and traders who push the prices of IT stocks to well beyond any resemblance of value."

Ords says that many of the IT stocks available suit investors looking to speculate who can wear day-to-day losses.

While there is some opportunity to invest in technology in New Zealand, most experts consider the best way to get tech exposure is to invest into offshore markets, particularly the United States.

One of the issues investors need to be cognisant of in this stage of the technology cycle is that there are a plethora of companies, globally to invest in, however there is also considerable consolidation going on within the sector.

While one option is to buy lots of different tech companies and hope one is the winner, the other option is to leave that to the experts.

One of the key advantages of going into tech through a fund is that, because of their size, the manager has access to better information than the retail investor, plus they have the opportunity to partake in new issues and floats.

What's often overlooked in the tech sector is that there are other ways to get involved in it other than just the pure plays such as Advantage Group and Strathmore.

Companies like Telecom and INL are moving from the old economy to the new and others are learning to reinvent themselves along this line too.

BT Funds Management chief investment officer Craig Stobo says there are three trends in the development of the E-commerce sector.

Firstly, there is the dot.com mania where people are throwing money at Internet companies, even if they have no business. The middle stage is the technology infrastructure companies, such as the Microsoft and Cisco Systems in the US which are building the components that the dot.coms use, then there is the third stage of "clicks and mortar" where old economy companies use technology to better distribute their products, thus taking on the dot.coms.

Besides the listed sector there are also a number of companies in the unlisted market (as opposed to unlisted funds).

The three main ones in New Zealand are MoneyOnline (formerly Global Register) which is run by former BNZ adviser John Commins, Henley Global Investor and Global-E Bonds.

MOL has a whole raft of businesses in its stable, however its core business is a bucket shop for managed funds. The company aims to raise $1.5 million and use the money for advertising its services.

Under the Ords matrix it would probably rate a DDD. There is limited blue sky potential for the growth of the business that is little more than an online catalogue company, plus it can be easily replicated. In this sense its position is not particularly strong as a new player, which sufficient money, could come in and blitz its market position.

As for its profit potential that is a trade off between advertising costs versus the trail commissions (generally 0.25 per cent) earned on funds under management.

Henley is a charting software business run by Fraser Guthrie who was convicted, in 1991, on white-collar crimes and sentenced to 3.5 years in jail.

The company is aiming to raise $5 million to provide for the increase in profile, market expansion and growth of Henley’s subscriber base.

Currently the company is expecting sales to total $51,000 in the 12 months to March 31, 2000 and these are forecast to increase to $5 million a year later. Its profit projections are based on the company signing up 40,000 customer by March 2002.

Global-e Bonds is the third unlisted business seeking to raise money in the market at present.

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