Qa: Albert Toney

 

If you were a high-technology investor in the past 12 months, the last thing you probably want to read about is high-tech stocks. Most of these issues plummeted to a point that would make even the most patient investor panic. But if you feel bad, think how Albert Toney feels. Toney, a general partner and portfolio manager for Hambrecht & Quist Equity Management in San Francisco, is a specialist in high-tech securities. He is also the author, with Thomas Tilling, of High Tech: How To Find & Profit From Today's New Super Stocks (Simon & Schuster, New York City; 1983).

Wondering how super these stocks look to Toney today, INC. staff writer Lisa R. Sheeran asked him for the current lowdown on the high-tech scene.

INC.: You are a portfolio manager for high-tech stocks, and you have been something of a cheerleader for them in the past. Were you surprised when they took a dive?

TONEY: I wasn't surprised that they took a dive, but I was surprised that the dive was so deep. The smaller speculative issues, which include a lot of high-tech stocks, were quite overpriced relative to the rest of the market. So either the rest of the market had to catch up or the speculative stocks had to move down. Unfortunately, the latter happened -- and continued to happen through the end of 1983. Then, contrary to what most people expected, interest rates moved up in January. That brought everything down. And since high-tech stocks tend to be more volatile than the stocks that make up the market averages, they tend to come down more than the market. This second stage was a surprise.

INC.: "Overpriced," you said. Some people think high-tech stocks are always overpriced.

TONEY: The typical high-technology stock we look at has a financial performance -- return on equity, margins, turnover, and so forth -- roughly twice as good as the companies making up the market averages. So you might expect it to sell for twice the price of the market. You can I make some reasonable judgments about when things have gone too far by comparing the price of these stocks with the rest of the market.

INC.: You also mentioned volatility. Are high-tech stocks volatile simply because most of the companies are young?

TONEY: Only partly. Contrary to popular perception, these companies as a group don't tend to have more volatile earnings. What affects the stocks is the volatility of people's expectations. The companies are treated as growth stocks, and are affected more than other equities by changes in expected future dividends, selling price, or interest rates.

INC.: What is your working definition of high tech?

TONEY: Our first criterion is growth potential. If the industry is not expanding, we won't include it in our universe, even if the technology is sophisticated. Nuclear power is high tech but the industry isn't growing, so we don't include it. Second, the companies either are involved in some form of electronics or are a direct beneficiary of changes in the electronics field. This includes telecommunications, the computer industry, medical fields that are affected by electronics, companies producing military electronics, and software, along with the distribution functions related to these industries.

INC.: These companies must have some distinctive characteristics. In analyzing them, what do you look for?

TONEY: The ideal high-tech company is one whose fortunes are driven by technology. The personal computer industry, for example, is market-driven rather than technology-driven. In a mass market like that, the technology has to have slowed down enough to allow volume production. This implies that distribution and sales capability are the key skills, whereas if you are selling some exotic widget to a guy in a lab, you may not need those skills.

If the company is technology-driven, your assets in many ways are intangible: They are in the heads of the people. In traditional investment analysis, book value is an important criterion for deciding whether the company is appropriately valued. But in high technology, the value of plant and equipment may be much less important than the value of the thoughts in the president's head. So as a group, high-technology companies tend to sell at a high price relative to their book value. Also, the relative competitive position of a high-tech company can change very quickly. That's why many of these companies are run with a fairly conservative financial structure. If your competitor across the street has an improved widget and he's killing you, you're going to have to double your R&D budget to catch up to him. And unless you have a strong financial situation, the situation could mean your death.

INC.: How important is a company's return on assets as a measuring stick?

TONEY: That is always important. It has the advantage of removing the effect of financial leverage, which you don't have using return on equity. And it s simpler for the inexperienced investor to use because it's the number at the bottom of a company's balance sheet. It's easy to find.

INC.: How about the company's size and age?

TONEY: Younger companies in general are riskier than older ones, but that's not a blanket rule. The importance of a company's size and age varies from industry to industry. And in some industries you may be better off with a younger company. For instance, the semiconductor industry is changing very rapidly now, and the companies that are apt to do best in the next recession are probably those in new product areas. So in this industry, I would be inclined to go with a younger company.

In the medical area, the markets tend to be small and fragmented and to saturate quickly. So it's sometimes better to seek a smaller company in this industry, too, because it is less apt to be nearing the end of its strength. In the personal computer industry, by contrast, a bigger company with more marketing capability is a better place to be than a company that has a better mousetrap.

INC.: What growth projections do you consider attractive at the moment?

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