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12/17/2004
06:25 PM
William Schaff
William Schaff
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Taking Stock: The Perfect Present, Or Coal And Sticks?

Investing in technology can be tricky, so be careful what you buy.

Will you be lucky enough to receive a nice present from Santa Claus in your technology-investment stocking this year? Returns posted by tech stocks this year were pretty much hit or miss. While tech stocks delivered slightly positive returns in 2004, one had to do more than just be in tech stocks; stock selection was key to any meaningful performance.

Tech stocks as a group returned 9.4% this year on a market-cap-weighted basis. (This article is based on the performance of 540 U.S. stocks with a market cap greater than $250 million. Returns are measured from Dec. 31, 2003, to Dec. 14.) The median stock, however, rose only 2.5%, telling us that smaller tech stocks performed worse than larger ones did.

The discrepancy between winners and losers was noteworthy. The best-performing stock in 2004 was Travelzoo, an Internet publisher, rising an astonishing 948.5%. A number of others also delivered enviable returns. Several Internet-related stocks--including Aladdin Knowledge, InfoSpace, Jupitermedia, and VeriSign--rose more than 100% this year. There were even some household names that performed admirably, including Apple (up 205%), Taser International, (up 296%), Autodesk (up 180%), and Research in Motion (up 156%). The company that captured so many headlines with its IPO, Google, rose 110% since its debut.

Losers never seem to be that difficult to find in the stock market. The communications-equipment industry saw more than its share of decliners, and it should come as no surprise that this year's worst performer emerged from this group. Redback Networks saw its stock price dive 70.5%. The semiconductor and semiconductor-capital-equipment industries were responsible for the next bunch of underperformers stemming from a combination of weakening industry fundamentals and company-specific issues. This pack includes Advanced Energy Industries, down 68.4%, Amkor Technology, down 65.9%, and Mindspeed Technologies, off 63.7%.

Looking at the tech landscape from an industry perspective, semiconductors and semiconductor capital equipment turned in the worst performances by far, declining 18.0% and 17.8%, respectively. The only other industry to saddle investors with negative returns was the electronic-manufacturing-services industry. At the other end of the spectrum, Internet-related stocks as a group delivered a stunning return of 71.4%. This, however, was to some extent driven by large-cap stocks such as Google, VeriSign, and Yahoo. The second-best-performing group of stocks during 2004 was home-entertainment software, which experienced an increase of 33.4%. Application software had quite disparate returns when looking at the individual securities; as a group, though, the sector returned a healthy 23.3%.

I hope Santa Claus treats you nicely this year. If he doesn't, there's always 2005. However, as the performance of tech stocks shows, investing in this group can be treacherous, so be selective. Happy holidays.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at william.schaff@bayislefinancial.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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