(MONEY Magazine) – SEPTEMBER '98 "The Biotech Boom"

A year ago, big pharmaceuticals were the market's darlings, and biotechnology companies looked cheap. Since then, the roles have been reversed.

Investors, it seems, think biotechnology is starting to grow up; the Dow Jones biotech index has gained 43% since our story, and the six biotech stocks that we recommended are up an average of 62% as of Sept. 20. Affymetrix has been the best performer by far. It trades at four times our $26.75 recommended price. The company makes scanners and chips used for analyzing DNA and is benefiting from a first-to-market advantage. Although Affymetrix has had a huge run, Dain Rauscher Wessels analyst Todd Nelson thinks that the stock can move up another 20% or so in the next 12 months.

Affymetrix recently got a boost at the expense of another one of our picks. In September the U.S. Patent office ruled in Affymetrix's favor in a dispute with Incyte Pharmaceuticals over chip design. The stock is down 34% since our story was published. "The ruling definitely was bad news for Incyte," says Eaton Vance analyst Carl Gordon. Chips, however, account for less than 10% of Incyte's business; the company's main sources of revenue are still its genetic databases, which big drug companies license. Investors appear to be overreacting.

Medimmune is our other big biotech winner. It has almost doubled since we recommended it at $58.75. The 1998-99 flu season was a good one for Medimmune's drug, Synagis, which prevents respiratory infections in premature babies; sales totaled $216 million. Nelson estimates that sales this season will reach $350 million and ultimately surpass $600 million. "No other drug has been approved for this usage," notes Nelson, who recently raised his 12-month price target on Medimmune to $150.

The two big drug stocks we recommended in that same story have, like the rest of the sector, been held back by pending Medicare reform and upcoming patent expirations, among other things. Merck shares are up 13.4%, while Eli Lilly stock has been flat. We liked the pair based on their alliances with biotech firms and their appealing valuations. These factors, and our opinion on the stocks, haven't changed.

The stock that's had the hardest time is agricultural biotech giant Monsanto, which has been dragged down almost 34% by a European backlash against genetically modified foods. This could dampen farmers' demand for the bioengineered seeds Monsanto sells, but we believe it remains the leader in a long-term growth business. "The company has delivered on the earnings, but the controversy over genetically modified food has overwhelmed it," says Sam Isaly, manager of Eaton Vance Worldwide Health Sciences fund, which has 4.6% of its portfolio in the stock. In the meantime, Monsanto's drug division, Searle, is expected to push company profits up 33% next year. --SARAH ROSE

MAY '99 "Tech Stocks for the Next Decade"

Maybe we should have called it "Tech Stocks for the Rest of This Decade." You see, the 10 companies we profiled just six months ago are up an average of 92%. That's right, 92%.

We selected firms that are solving bottlenecks through better chip designs and improved hardware and software for data transmission and storage. Several of our picks were semiconductor companies that speed communications along networks, and as networking continues to accelerate, the market has rewarded these companies with especially spectacular gains. QLogic, whose products hasten data transfer between computers and big storage systems, has rocketed 256%. High-speed chipmaker PMC-Sierra is up 173%. JDS Uniphase--the result of a recent merger between the fiber-optics component maker Uniphase, one of our choices, and JDS Fitel, a Canadian competitor--has soared 127%.

All 10 companies continue to exhibit sustainable competitive advantages in important markets. All of them are still rapidly growing earnings (nine of them actually beat second-quarter estimates). And all of them remain excellent long-term holdings. But the ongoing bull market in communications chips has produced wacky valuations for most of them; based on calendar-year-2000 estimated earnings, six now sport P/Es over 60. Our 10 selections now have an average PEG ratio of 1.7, up from 1.1 when we published our story. The potential for a near-term correction is high. Investors with a short time horizon should consider taking some gains.

Three of the 10, however, are still flying low enough that their P/E ratios are beneath their projected rates of earnings growth. That is, their PEGs are less than 1.0. Novellus (up 29% since publication; 2000 P/E of 22.6; projected growth 25%) and Rambus (up 44%; P/E of 72.2; projected growth 75%) are more closely tied to traditional semiconductor manufacturing than our other selections. Novellus produces chipmaking tools; Rambus designs interfaces that connect microprocessors and memory chips. Both swing on news from the PC chip industry. Rambus, which is highly dependent on its relationship with Intel, has been particularly volatile.

The third, Synopsys, has remained cheap. It has gained 29% since our story, but it still has a P/E of just 19.5 while it's increasing earnings at a 20% clip. Investors have shied away from electronic design automation (EDA), where Synopsys is the No. 2 firm, largely because in June, No. 1 Cadence Design Systems missed earnings estimates badly. However, engineers need EDA to keep crafting more complex and powerful chips, and Synopsys remains the innovator in the field. --PETER KEATING