Top Technology Picks for 2002

High-Tech Investor

Top Technology Picks for 2002

Wynn Quon

Let’s review what happened to the markets in 2001 and then see how our picks for last year did. The Dow started at 10,600 in January 2001 and in early December is waltzing around the 10,050 level for a drop of 5%. The NASDAQ started at 2300 and is now 2020, a fall of 12%. Of course, anyone who follows the market closely knows these numbers don’t do justice to the year’s tumultuous events. The low for the year for the Dow was 8062, a drop of 24%, for the NASDAQ it was 1387, a drop of 45%.

How did our picks do? Our strategy last year was to pick three vehicles, one for each kind of economic weather: the good, the bad and the ugly.

Our fair weather pick was Analog Devices, a gunslinger, semiconductor stock which was at US$55. It hit a high of US$64 before settling down to its current US$46 level (-16%), not surprising considering the depressed demand from telecom equipment manufacturers. We never really got the fair weather most commentators were predicting.

Our pick for bad weather was AMD(NYSE:AMD), the microprocessor maker. We picked it because it was trading then at $14. At that price it was a value play. Value plays typically don’t suffer as much as high fliers during market downturns. This pick turned out well in the first quarter of the year. AMD soared to US$34 for a 143% gain. Then the slowdown in the PC industry broadsided the stock pulling it down to its current US$18 level for a gain of 28%. Not bad but the stock was incredibly volatile with a year low of US$7.69.

Our pick for ugly weather was January 2003 Cisco $35 Put LEAPs. Given the bad markets, they did exceptionally well. These are long-term put options which we bought for $6.50 last year. They are now at US$14.40 (+121%) but traded over $25 (+284%) when the NASDAQ plummeted in late September.

What’s ahead this year? I’m inclined to think that we’re in the middle of a false rally and that we will revisit and even fall through last year’s lows before we get over this downturn. Even so, we’re not going to make a one-sided bet on which way the market will go. To be successful, you have to hold your market opinions with a very light hand. Instead, we’ll once again set up a triple weather play.

For fair weather, we pick Symantec (NASDAQ:SYMC) a software maker. You may know them as the company behind the Norton Utilities for PCs and especially the top-rated Norton Anti-Virus. It’s selling at US$67. It’s not a cheap stock, (there’s probably downside risk to US$40) but if that long-awaited economic recovery comes this year, this stock could head higher on stronger PC sales. Its anti-virus and security products will continue to do well in the post-September 11 world. What about last year’s pick, Analog Devices? I still think it’s an excellent company and we’re keeping it in our portfolio but it isn’t the best fairweather pick for one reason: their sales have fallen by 50% in the last quarter while the stock price has stayed up. The market has already factored in an imminent recovery into the stock price. That doesn’t leave us much safety room.

Our bad weather pick needs to be a value technology stock. Unfortunately they’re hard to find in the current bounce back in tech shares. We’re going to pick Goodrich (NYSE:GR). This company has a healthy aerospace division which has recently won a multi-billion dollar contract for the Joint Strike Fighter. It trades at a discount (a P/E of 8) because of a troubled industrial products division. The good news is that the company will likely split into two separate companies early in 2002. The unlocked value may mean good upside for shareholders. Another good sign for the stock is the significant amount of insider buying since September. By the way, most people think of tires when they think of Goodrich even though they stopped making them a decade ago! For the value investor, this mistaken popular image is an added bonus. It means we can buy a stake in a technology company at a tire company price.

For our ugly weather pick we’re once again hedging with some put options. Put options aren’t for everyone. If you use them you should think of them in the same way you think of the insurance policy on your house, for example. They should never be a large part of your portfolio nor should they be traded frequently. Used properly put options can take the sting out of sharp market declines. This year we’re buying S&P 500 Dec 2003 $90 Put LEAPs which are currently going for US$4.10. These options will turn a profit if the broad American stock markets fall more than 25% in the next 2 years. Why not continue with put options on technology stocks like we did with Cisco last year? With the bursting of the tech bubble, the put options no longer offer as attractive a risk-reward ratio.

Wynn Quon, Chief Technology Analyst, Legado Associates. wynn_quon@hotmail.com

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