High Tech and Biotech

05/20/2005 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

While many view "tech" as a 1990s phenomenon, Michael Murphy began his career studying tech stocks in 1970, and later developed an expertise in biotech. Here, he looks at the outlook for these sectors, the Fed, the economy, and some of his latest stock ideas.

"We’re still very early in the technology wave. The underlying drivers of technology have a long, long way to run. It is a technology economy and it will stay a technology economy for a long time. And just to get the smallest hint of what’s going on, consider that the $1,000 PC that you use today has the brainpower of perhaps a dragonfly. You can do a lot with that. But in ten or 12 years, that same PC will have the brainpower of a human being. We are going to see tremendous new software, tremendous new applications, and radical changes in the way we live, work, and entertain ourselves. All these things will change dramatically, and there is no real slowdown, particularly considering that this is a worldwide phenomenon with six billion people. Tech stocks go up and down, but technology just goes forward.

"The next tech wave is well underway. Semiconductors are selling at record levels. Business is great and it will be good all year. So the question is, ‘When will Wall Street pay for that?’ I’ve been saying for eight months that the Fed will raise interest rates a quarter point at every meeting this year. That gets us to much higher levels at the end of the year than most people currently believe. I think we’ll get to 4.5%, because the Fed always wants to leave themselves as much wiggle room as they can get for the next downturn. So they will keep raising rates until the economy slows. And they will likely overdo it. So the economy is going to slow in 2006 and may even worry people about a recession.

"Short term, we think we will have a very sharp rally, because people are currently too pessimistic. There is an awful lot of money on the sidelines. So I see a rally perhaps to mid-July. But after that, thanks to Mr. Greenspan’s continuation of raising rates, we’re really worried about what happens. I think one of the biggest lies in America is that Alan Greenspan knows what he’s doing. Greenspan just keeps raising rates until it kills stuff, and then he stops. He doesn’t know when it’s going to kill stuff. And it’s the last couple of rate hikes that really hurt the market. Think of it in these terms: the last place you find your car keys is the last place that you looked. After that you stop looking. In that light, I think Greenspan is just ‘looking until he finds the keys,’ he is going to raise rates every single meeting this year until the rate hikes cause damage. That’s what has me worried.

"On a short-term basis for an expected near-term rally, I think you can make money on Alvarion (ALVR NASDAQ), which is the leader in WiMax, a technology within wireless broadband convergence. The stock has been depressed for ‘dumb’ reasons. Fundamentally, we’d buy it all the way up to $13, with a target of $20. Packeteer (PKTR NASDAQ) is a VoIP company. The stock is a buy under $14. This company is essential to voice over Internet protocol. What they do is called traffic shaping. They manage the traffic and they allow you to compress things that can be compressed easily, like data and video, and not compress voice. And you need to be able to distinguish that in order to maintain quality of service. We have a target of $18. We also like Zhone (ZHNE NASDAQ), which is a more speculative, low-priced stock currently trading at $2.56. We consider it a buy under $4 with a target of $7. They produce Internet access products, which they sell to either telephone companies or cable companies, who in turn, resell them to their customers.

"After this expected rally, we plan to shift assets out of tech and expect to buy healthcare stocks in September and October. Within the heath sector, I’d look at Amgen (AMGN NASDAQ) as well as e-Research (ERES NASDAQ), which is at 11.09. We’d buy it up to $15. I also like Cell Therapeutics (CTIC NASDAQ), which is a $3.50 stock. We’d buy it all the way up to $5. I think this could be a $15 stock by the end of the year. But something has to work here, which is they have to be able to file with the FDA for approval of their drug. It’s a drug that is a perfect substitute for taxol, without the side effects. Also, within biotech, we also like Denderon (DNDN NASDAQ). These last two are small-cap biotechs that have their futures in their hands. They are totally independent from what happens in the economy, and we think they have some great drugs coming along."

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