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Euro tech stocks on watch
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June 15, 2000: 10:53 a.m. ET
Amid volatility, experts say investors should be choosy in high-growth sector
By Staff Writer Jamey Keaten
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LONDON (CNNfn) - For years, Wall Street's upsets have inevitably reverberated through Europe, and recent spills show "new-economy" stocks aren't immune to that rule. Financial experts recommend investors in the region tread carefully to avoid the wreckage.
It took no time for tumbling prices on Nasdaq, the U.S. growth-stock exchange, to produce similar declines in Europe's computer technology, telecom and media sectors. Benchmarks such as Frankfurt's Neuer Markt and London's TechMark have plummeted a third or more since March, stamping on any impression high-tech equities carried a get-rich-quick guarantee.
Not so long ago, it was the norm for European investors, like their Wall Street counterparts, to have a "buy-anything-tech" mindset, market players  now admit. You can't get away with that any more, they acknowledge, cautioning that selectivity is now the watchword with "new-economy" issues. Good management teams and solid business plans are suddenly every investor's priorities.
In the high-tech arena, typically Europe has been behind the U.S. - with the notable exception of the mobile telecommunications industry. Experts say that means there should be greater potential for earnings growth, and hence stock-price gains, as Europe builds out its high-tech sector.
Market experts are by no means uniform in their predictions. But many concur that Internet content stocks are to be approached with caution, while shares in companies that are building the infrastructure of the Information Age - makers of software and hardware for computers and telecommunications -- offer Europe's safest "new-economy" bets.
Techs have high debts
Even so, most of these high-growth companies are seen as susceptible in the near-term climate of climbing interest rates because they typically have high debt levels to finance their growth - and rising interest rates pose a threat to inflated share prices.
"The odds are against making a lot of money in the tech sector in June or July," says Michael Bourne, a fund manager at Finsbury Technology Trust. "The prospect of higher interest rates puts a cloud over technology stocks."
Indexes such as the Neuer Markt, and TechMark began to take off as recently as November 1999, more than a year after their Wall Street counterparts. Most of these indexes, replete with technology, telecom and media issues, rocketed threefold or even more before peaking in March.
It's been mostly downhill since then. From their highs in the first half of March, the Nouveau Marché index in Paris is down about 45 percent, the Neuer Markt down 32 percent and TechMark has fallen 41 percent. 
On the FTSE Eurotop 300 index, made up of Europe's 300 largest companies, declines in the index segments that track high-tech industries tell the same story. The software shares sub-index has fallen 41 percent from its high, the telecom sector is down about 25 percent from its record close, and the media component is off 29 percent.
The downturn in tech share valuations may be nearing its end, however, according to Peter Hoffman-Fischer, head of investment banking in Germany for U.S. securities firm Robertson Stephens, who notes that despite the turbulence, investors aren't pulling out of the market to any great extent.
"That leads you to believe that investors think we are getting close to the bottom," says Hoffman-Fischer. "What's being scrutinized now, as opposed to before, is the quality of management teams, and, in e-commerce plays, visibility of revenues."
Sector-by-sector views
J.P. Morgan's Kevin Gardiner and Tim Harris last week said in a report to investors that of all the businesses regarded as part of the new economy, computer hardware makers may be the most resilient in the face of a cyclical downturn, followed by software companies that operate information technology systems.
The FTSE-300 IT hardware sub-section - with constituents ranging from Swedish mobile-phone and networking company Telefonaktiebolaget LM Ericsson to French-listed computer-chip maker STMicroelectronics NV (PSTM) - has been the exception to the big setbacks affecting other areas of the technology industry in recent weeks. The index has fallen only about 2 percent from its record close on May 2.
Telecom companies are more vulnerable, say the J.P. Morgan pair. They face the high cost of nabbing next-generation cellphone licenses in Europe, and some are redrawing their strategies after stumbling over botched takeover and merger plans - such as Deutsche Telekom AG's (FDTE) abortive effort to win control of Telecom Italia SpA. What's more, they typically suffer from being too unfocused in their approach to a vast industry: trying to keep with the pace in sectors from cellphones to the Internet and local phone services may be too big a task for an individual firm, say the analysts.
Even though telecom stocks have fallen in recent months, the time isn't ripe to jump back in, say Gardiner and Harris, who describe their recommendation on the sector as "neutral." European telecom stock values are today nearly double what they were at the start of 1998, according to the analysts' figures, while shares of their U.S. counterparts are up about 10 percent over the same time.
Growth set to accelerate
Ed Protheroe of Aberdeen Investment Management is more optimistic. He said the telecom market has hitherto been growing at about 7 percent per year, but there are signs that with new technology and an ever-expanding range of telecom services, that could quicken to 20 percent a year and stay there for the next decade. Europe added 20 million new mobile-phone customers in this year's first quarter alone, Protheroe says.
The Internet sector has seen the wildest price fluctuations. The examples are legion, but take ebookers.com (EBKR: Research, Estimates), a British-based online provider of airfares and auto-rental services. The company's American depositary receipts began trading on Nasdaq at $19 apiece last November, soared to more than $40 by March, but had fallen back to $13 by Wednesday's close.
Some experts are keeping their hands off Internet plays, insisting that share prices are still too high in a sector where losses are, for now, an accepted part of doing business and signs of the Web's much talked-about revenue potential are too few.
Others, like Miles Saltiel, an analyst with securities firm WestLB Panmure, maintain that a selective approach to online stocks can pay off. Saltiel  's recent research report fingers companies that offer Internet access, business-to-consumer services and online investment as among the most overvalued. But he says providers of Web software and Internet tools are still worth investors' attention, and even likes companies that offer Internet content - contrasting in this view with many other investment experts.
What many European Internet investors have in the back of their minds is the debacle of boo.com. The privately owned U.K. online sportswear retailer went belly-up last month amid what many termed its profligate, high-on-the-hog approach to business - spendthrift even for venture capital-enriched cyberspace executives.
Consolidation may give flagging share prices a lift. British Internet service provider Freeserve Plc (FRE), whose shares have lost more than half their value since March, has risen in recent weeks amid speculation it might be the subject of a takeover. German ISP T-Online International AG, a unit of Deutsche Telekom, is seen as the top bidder.
More European IPOs in prospect
Europe's technology, media and telecom firms haven't always garnered the explosive interest their U.S. counterparts have - such as the 690-percent first-day rally for software company VA Linux Systems Inc. (LNUX: Research, Estimates) or the 600-percent IPO explosion for Internet community operator theglobe.com Inc. (TGLO: Research, Estimates). 
Even though Europe has been more wary of high-flying IPOs, the region has had a fair share of eye-popping performers: Spanish Internet service provider Terra Networks SA soared 185 percent last November, Italian ISP Tiscali SpA jumped 50 percent last October, while the U.K. fiber-optic equipment maker Bookham Technology Plc (BHM) rose 150 percent in its European début in April - at a time when investors were growing increasingly jittery about tech-sector valuations.
Because Europe has lagged behind the U.S. in the technology stock run, the region may not have run through its IPO cycle and may still offer some hot issues down the road.
The most recent high-profile European offering, British online bank Egg (EGG), fared well in its market debut on Monday, while Swedish telecom company Telia AB jumped roughly 10 percent in its IPO on Tuesday.
"The U.S. IPO market has gone totally dead, while Europe has been a bit slower to turn off the tap," says Finsbury Technology Trust's Bourne.
As on Wall Street, some widely anticipated IPOs in Europe have been shelved, such as British video-on-demand provider YesTV and the Dutch high-speed Internet access provider Chello. Others that have gone public have been a disaster: Web portal Lycos Europe NV is down about 42 percent since its IPO, and Amsterdam-based ISP World Online International NV has plunged 67 percent since it went public at  43 per share.
"There are still some poorly funded Internet disasters out there waiting to happen," warns Bourne.
The message from tech followers in Europe is that by keeping eyes open and taking a discriminating approach, investors need not turn their portfolios into new-economy wrecks. 
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