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How to pick winners among high-tech stocks

Friday 15th September 2000

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PETER V O'BRIEN finds a way through the investor confusion between highly advanced technology companies and retailing on the internet

The technology balloon has not burst but recent pinpricks caused considerable deflation.

Internationally, the US Nasdaq composite index fell 120 points last Friday (6%), going under 4000, when some high-flying companies warned their profits would be below expectations.

Things did not look much better at the beginning of this week. News out of the US followed earlier reports that online retail companies, particularly the smaller ones, were facing problems.

Retailing through the internet could be described as a 2000 version of the oldstyle mailorder catalogue system, although the current electronic system is, or is supposed to be, much faster.

Some of the problems with e-retailing seem similar to those that arose - and still can arise - with mail order.

They are, in no particular order, delivery on time, goods delivered being the same as those described, availability of supplies and questions of quality.

The issues of goods being the same as those described, and quality, are covered in New Zealand under several statues, including the Consumer Guarantees Act 1993 and the Fair Trading Act 1986.

Problems can occur when people take up offers on the internet, if the offers have an international flavour; that is, buying goods from overseas for delivery in New Zealand.

Pursuit of remedies under New Zealand law in such cases could have a jurisdictional problem as well as being expensive, irrespective of what the offeror said about the product.

The cost of setting up an internet retail operation can be costly, although the rewards may compensate for the outlay, and that affects small businesses with limited financial resources.

Highly advanced technology companies, as opposed to those based on the internet, are a different category.

Many may operate at the frontiers of particular technologies, with consequent risks.

There have been numerous examples of stocks selling at astronomical prices before they had revenue, positive cash flows and/or profit.

That phenomenon could be compared with similar booms in the share prices of, for example, bluesky mineral exploration companies before they confirmed commercial deposits.

A lack of discrimination among investors, internal and local, professional and private, can be blamed for the current volatility of technology stocks.

It seems anything that could be seen as involved in computers, telecommunications, their associated suppliers and the internet get a "high-tech" tag and drew in "investors," some of whom were speculators with little knowledge of the products/services, financial strengths, managerial competence, potential markets, productive capacity and industry competition.

Examination of those matters has been considered basic in relation to the "old" economy but apparently can be ignored in the "new."

Companies involved in various forms of e-commerce, telecommunications, computer applications in specific industries and general internet activity listed on the New Zealand Stock Exchange have slumped from their 2000 price highs, with a few exceptions.

Baycorp has been a top performer this year, assuming it is acceptable to classify the company as a technology stock based on its computer-application network and associations with overseas groups of a similar bent.

Opinions differ on what could be classified as technology stock on the New Zealand exchange, using the term in its broadest sense.

But at least 16, including Australian companies such as Telstra, are listed.

They range in size from Telecom to Beauty Direct.

Associations with technology stocks go beyond fancy work on the internet or the supply of advanced telecommunications equipment.

An example was seen last week when rural services company Wrightson and Genesis Research & Development Corporation announced they would form a long-term research and development partnership.

They are combining Genesis' expertise in genomic (another technology word) discovery with Wrightson's ability to "create and deliver solutions for New Zealand farmers."

The partnership would undertake genomic research into pasture grasses, focusing "first on specialised DNA databases for two new generation Wrightson ryegrass varieties" to develop improved systems for pasture management and increased agricultural productivity.

Such a venture may seem much less exciting than selling widgets over the internet but is more important to the New Zealand economy and its future than a glorified mail-order business.

Genesis chief executive Jim Watson said the alliance was about enhancing agricultural methods by developing innovative plant products that would improve productivity for New Zealand farmers.

Dr Watson said the agreement would see Genesis take a position and build capability in a primary industry that combined its expertise in gene discovery with Wrightson's strengths in product development, marketing and distribution.

Wrightson chief executive Alan Freeth said the partnership involved co-operation between agricultural, farming and business expertise, with a leading science and technology base.

Dr Watson and Dr Freeth summed up what investors should be looking for when they put money into "technology" stocks.

The current fad for anything that can be given a technology tag smacks of the frenzy in so-called investment companies in the 1980s before the crash. We know what happened to them.

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