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12/21/2003
07:47 PM
William Schaff
William Schaff
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Taking Stock: Not All Stocks Left Presents This Year

It's been a wonderful year for technology companies and their related stocks. In fact, technology stock indices have been on a tear. The InformationWeek 100 index is up almost 59% year to date. The broader Goldman Sachs Technology index is up about 50% for the same period.

There've been very few laggards. The most beaten-up sectors have recovered the most. Internet-related stocks are up about 84%, but that pales in comparison to the 100% return—yes, we're back to three-digit returns soon after I said it was unlikely that tech investors would ever see that again of networking stocks measured by Goldman Sachs' Internet- and networking-sector indices. Semiconductors rose 79%, followed by hardware at 52%. The only sectors of technology that lagged the broader index were software (39%) and services (20%). The services lag isn't too surprising, because that includes scandal-ridden EDS, one of the largest IT consulting companies in the world. But even the weakest sector of technology is keeping up with the broader equity markets measured by the Standard & Poor's 500. My guess is that more than a few of us will be celebrating the New Year with a higher-quality bubbly than last year.

With numbers like these, it's hard to find many opportunities for the upcoming year. What are investors to do? Sometimes it helps to look at those securities and sectors that have really lagged the broader index. Going through our InformationWeek 100 list, I see that there have been a few losers this year.

The first group is the telecom service providers. AT&T was down 27%; SBC and Verizon were down 9% and 13%, respectively. This is a group that's finding deregulation and increased competition hard to digest. The bottom line is that sales and profits have been in decline for years and have yet to stabilize. Some investors might be tempted by the high dividend yields because they're taxed at only 15%, but the companies are still struggling to stem the decline in financial fundamentals. If you believe the market is likely to correct from its current levels, the telcom providers tend to decline less than the broader equity market.

One of the stocks to lose ground throughout the year was a big surprise: Automatic Data Processing. This is a company with such a stellar history of sales and earnings growth that it was a staple in almost every investor's portfolio. It's amazing what one earnings miss will do for you after a decade of consistent earnings performance. As usual, investors hate negative surprises. Concord EFS, a payment-processing company, under the cloud of a buyout by First Data, declined as the deal looked like it was going to fall through.

Two stocks I was surprised to see fall are Internet Security Systems and Network Associates, software-security companies. Under the current buy-anything-technology mentality, I'd have expected the stocks to have done better despite weak demand for enterprise software. However, both of these stocks greatly lagged their peers. Though Network Associates may look relatively cheap, its peer, Symantec, is probably a better long-term bet despite the higher price. Execution and management will count even more if investors believe the technology sector might be overvalued today.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.


To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

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