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Over the past year, technology stocks have been responsible for driving the market to stratospheric highs. That’s not to say that investors haven’t been able to take advantage of periodic dips, using them as an opportunity to snatch up some prime companies at bargain prices. Patrick Lyons, research analyst for NCM Capital Management, a subsidiary of Durham, North Carolina-based Sloan Financial Group, has been one such beneficiary. He maintains that “technology represents long-term value for investors.”
A year ago, Lyons recommended five stocks, including Armonk, New York-based IBM (NYSE: IBM) and Houston-based Compaq Computer (NYSE: CPQ) (see “There’s strength in tech stocks,” Moneywise, March 1998). “You have a lot of corporations spending money on Year 2000 conversions to avoid software and computer disruptions when the new millennium rolls around,” says Lyons. “This is going to be a driver for companies like IBM and Compaq.”
He also believes that as more companies prepare for e-commerce, they’ll need new equipment to handle online transactions. This development bodes well for IBM, which is supplying hardware, and through its Lotus subsidiary, software to access such dealings. This year’s earnings estimate for Big Blue, the world’s top provider of computer hardware and second largest software producer, is $7.49 per share compared with $6.54 for 1998.When Lyons made his recommendation, IBM was trading at $100.13. As of early January, the stock traded at $187.56, a12-month return of 62.9%.
Compaq, the third largest computer company behind IBM and Hewlett-Packard, holds the rank as the No. 1 PC maker in the world. In an effort to increase sales to corporate customers, Compaq is still in the process of absorbing its latest acquisition, Digital Equipment Corp., into the fold. The industrywide decline of PC prices left Compaq with loads of excess inventory. “This is about to change now that the company has adopted the Dell approach and will sell [its products] directly to consumers instead of through resellers,” he says. Last year, Compaq’s stock split 2 for 1, trading at $29.75. By January, shares climbed to $45.38, thanks to the surge in direct business and consumer sales. Earnings per share estimate for 1999 is $1.76, compared with 46 cents for 1998.
With the growing trend of outsourcing, Lyons maintains that SCI Systems Inc. (NYSE: SCI), the Huntsville, Alabama-based firm that designs and manufactures electronics products, remains a good buy. “On average, PC companies outsource 5% of their manufacturing,” he says. “But that trend is expected to reach the 20%-25% range over the next couple of years.” As a result, big manufacturers will be able to substantially reduce labor-related costs by paying a fixed rate per computer and, in turn, boost corporate profits over the last five years. As of January, SCI traded at $53.31, compared with $38.13 a year ago, a 39.8% return for the year.
Major corporations heavily use mainframes and workstations provided by Sun Microsystems (Nasdaq: SUNW), the Palo Alto, California-based supplier of network computer products. A hot area for Sun is the Java software language. Such companies as MasterCard and