Just How Hot Are Technology Stocks?
Sep. 05, 1995
Technology is hot. Or red hot. Or maybe just warm.
Depending on where you look, since the beginning of the year the technology group has gained anywhere from an impressive 37.6 percent to a practically unbelievable 96.8 percent.
Confusing? You bet. Since technology zoomed to the top of the market late last year, Wall Street has been touting all kinds of ways to best measure the high-flying group even as technology shares have sputtered in the past month. And, it seems, new measures are coming out almost every week.
Most market pundits have settled on a handful of measures to determine the broad market's health, such as the Dow Jones Industrial Average or the Standard & Poor's 500-stock index. But no single standard has emerged as the bellwether index for the technology group. At last glance, more than a dozen technology indexes dotted the landscape.
Just a few weeks ago, the Chicago Board Options Exchange introduced its own technology index to the crowded field, made up of 30 stocks in the semiconductor, software, networking and computer areas. Prudential Securities also is developing a technology index.
The field is already crowded with Morgan Stanley's high-technology 35-stock index, the American Stock Exchange computer technology index and the Philadelphia Stock Exchange semiconductor index.
Beyond these measures are some old standbys, such as the Pacific Stock Exchange high-technology index, the Dow Jones technology composite index, the Standard & Poor's computer, software and semiconductor indexes, the Hambrecht & Quist technology index and even the Nasdaq 100 index of the top nonfinancial companies in that market.
``It just shows how Wall Street is trying to find the best way to measure this popular sector,'' says Don Hagan, an analyst with Ned Davis Research Inc., a stock market research concern in Nokomis, Fla. ``We certainly aren't seeing a host of new forest products indexes.''
The growth in tech indexes also stems from a need to hedge some bets, analysts say. By using options on the traded technology indexes, investors can reduce some of their risk in the notoriously volatile sector, says Mr. Hagan.
But, for the most part, the proliferation of technology indexes grows out of a desire to grab more business. Exchanges, such as the Amex, CBOE, Philadelphia exchange and others, hope intensifying interest in technology options will mean more trading income. And, it appears, the complex nature of the broad technology sector creates many variables that people want to measure.
``Right now the world of technology is so broadly defined that many of these indexes cover only certain areas, and not always the area of technology that's in the news,'' says Charles Crane, head of research at Spears, Benzak, Salomon & Farrell, a New York money-management firm. ``It can be a little confusing. Do you include biotechnology? Or electronic technology? Or telecommunications technology? Or all three?''
Each index has its own quirks. The Nasdaq 100 includes not only Oracle and Intel but also Northwest Airlines, hardly a tech play. Moreover, as a market-capitalization weighted index, big companies like Microsoft tend to dominate the measure's performance. The Morgan Stanley index, by contrast, uses an equal weighting for its 35 components to minimize the impact of a single player.
The Dow Jones Technology Composite includes companies from 12 industries and covers just about everything, including industrial technology and even office equipment, which might explain why it lags behind most tech measures with a 37 percent gain since Jan. 1. The Pacific Stock Exchange, popular because of its track record dating back to 1983, contains a good amount of biotechnology shares and is up 45.2 percent for the year.
The tech advance this year is concentrated primarily in semiconductors. So the Philadelphia Stock Exchange semiconductor index has been blistering hot, performing much stronger than, say, the Morgan Stanley high technology 35. In fact, the Philadelphia index was split on July 24 and is up a whopping 96.8 percent since Jan. 1.
``For the broad group, we prefer the PSE tech index or the American Stock Exchange computer technology index because they seem to be purer measures,'' says Ned Davis's Mr. Hagan.
But the purer measures sometimes don't get benchmark status with mutual-fund managers because they can be pretty tough to beat in a year like this.
At Kemper Financial in Chicago, the technology mutual fund measures itself against a combination of the S&P 500 and the H&Q tech index, which includes 200 stocks in fields as diverse as medical diagnostics to chip makers. Dick Goers, co-manager of the technology fund, argues that this gives the fund a better grounding in determining its performance against the broader market.
The infatuation with indexes isn't universal. Many analysts prefer to look at the broader market, even the technology sector, on a company-by-company basis.
``We really take our cue from the individual stocks, rather than from a given basket or index of stocks,'' says Eugene Peroni, director of technical research at Janney Montgomery Scott in Philadelphia. ``The advantage, in our opinion, is that it's easier to see the forest for the trees.''
Moreover, several technology indexes went on to set records in early August, even as big names like Intel, Applied Materials and Microsoft were sliding from their highs. That movement, some analysts contend, shows the real pitfalls of following indexes alone.
``When you follow just the indexes, it sometimes becomes difficult to see when the generals leading the way start to falter,'' says Walter Revis, chief strategist at Principal Financial Securities in Gurnee, Ill.
Next up on the index creation list: The Internet.
``This Internet stuff is just amazing,'' says Mr. Goers of Kemper. ``Why not have an index covering all of these companies, as a play on the Internet? Obviously there'd be a lot of volatility in such an index, but it would be a lot of fun to watch it go.''