High-tech Stocks Often Low-tech Performers For Investors
Sydney Morning Herald
Saturday December 2, 1995
AFTER a boom in late 1993 and early 1994, shares in technology stocks have plummeted to dangerous lows and many have been given the unflattering title "dog stock" by brokers.
But do technology stocks deserve this bad reputation?
Australian investors enviously watching the skyrocketing performance of US technology stocks may wonder if our fledgling high-tech companies may achieve similar success.
The enticement of spectacular returns is not their only incentive to invest.
Recently, there has been an array of articles and commentaries on the reasons - patriotic and economic - why investors should support our technological future and on the difficulties such companies have in finding funds.
Even the Prime Minister has got behind the cause, calling on fund managers to give small companies a go.
Fears of a brain drain among our top scientists and inventors have also given impetus to the save-our-tech-stocks cry.
But emotive arguments aside, most technology stocks haven't been great performers for small investors waiting for returns, and many don't want to sit around for 10, 15 or even 20 years.
There has been the odd performer like Mosaix Technologies but choosing these gems, according to the fund managers who invest in them, is like picking a number out of a hat.
Australians are often criticised for their gambling habits and, according to broker Mr Bob Vagg, of Burrows Ltd, investing in tech stocks is "just like the Melbourne Cup".
In fact, brokers usually put these companies in the same basket as speculative mining shares.
"They have a lot in common with gold stocks," says small stock specialist Mr Campbell Boag, of Rothschild.
"They come in and out of fashion quickly and are more volatile than the rest of the market."
The companies themselves say they don't deserve this bad reputation.
Vision Systems, for example, which has manufactured an airborne laser system to map the ocean floor, says its returns have grown steadily and the company has been within 5 per cent of budget for the past two years.
Vision director of finance, Mr Euan Pizzey, is critical of fund managers for their short-term reactions.
"We had fund managers on the trolley in 1993 buying at $10. Then they sold out at $6 or $7 and now the share price is back up to $10."
He says tech stocks are now so out of favour with brokers and analysts that his company has been forced to label its operations engineering rather than technology to escape the negative sentiment.
"We're excluding the tech word because it's not sexy in Australia, whereas in Asia the opposite is the case."
Brokers and fund managers admit they find the operations of technology companies difficult to understand but, as Mr David Paradise of Mercantile Mutual points out, there are also other problems facing these stocks which show them in a negative light.
For instance, technology companies need a lot of money for research and development which can create a sort of money pit.
"They have to keep spending money on R&D but they don't see the results for a few years and the market keeps changing," Mr Paradise says.
This rapid change in technology makes the business environment very difficult to work in.
"It's a difficult sector to invest in because it's changing so fast. The classic example is the guy who invented the Betamax video," Mr Boag says.
"It probably seemed like a good idea at the time but two years later it was a dud."
Mr Boag says there is also a list of other confronting problems.
"There may be timing delays in the commercialisation of the technology or it may be overtaken by competing technologies or the company may get into trouble during the commercialisation phase because it involves a huge stretch of management and financial resources."
While rapid growth in a company, and its share price, may be what some investors are looking for, such growth can take its toll on companies.
"It's very difficult to grow rapidly," Mr Boag says. "And it's difficult to get a new technology to grow steadily."
He says these problems add up to a high failure rate for new technologies and it's almost impossible to tell which will be the winners or losers.
"The problem is these companies can hit the wall very quickly. If you are six months late getting your product to the market there may be no market."
Additionally, because Australia has such a small population, many rely on export markets which are difficult to penetrate and expensive to enter.
Mr Pizzey says 90 per cent of Vision Systems's manufacturing is sold outside Australia and he says "nearly everyone" in the technology arena is now going offshore.
But according to Mr Peter Hall, of Howard Hall Funds Management, it can be very difficult to introduce an expensive product like technology on to an already competitive world market.
"Exporting is very difficult because you have to find distributors, it can be a nightmare."
Some small companies make the mistake of listing early to raise much-needed funds.
Westel's managing director Mr Peter Bartleet says that if he had his time over again he wouldn't consider a float of less than $10 million.
"It's just not worth it. Brokers suggested it was far easier than it turned out to be."
Similarly, Mr Pizzey warns other tech companies: "Don't list too early. The costs will just swamp you."
But according to Mr Vagg, many companies jumped at the chance to list when they saw tech stocks were the flavour of the month and the money was pouring in.
"With a lot of these companies one wonders whether they should have been floated at all because they probably shouldn't be there," he says.
Unfortunately some of these early listings helped put technology stocks where they are now: in the sin bin.
© 1995 Sydney Morning Herald