NEW YORK (CNN/Money) -
It hasn't been a fantastic year for tech stocks...but speculation is alive and well.
Investors have fallen head over heels in love with stocks of Internet search and handheld-computer companies (what is this, 1999?) as well as a couple of companies that traders are billing as homeland security technology plays.
Ask Jeeves (ASKJ: Research, Estimates) has soared more than 85 percent this year and new search engine on the block Mamma.com (MAMA: Research, Estimates) has surged nearly 270 percent.
Looking at handhelds, palmOne (PLMO: Research, Estimates), which makes the popular Zire and Treo devices, is up 83 percent...and that doesn't include Tuesday's nearly 40 percent gain following the company's better than expected fiscal fourth quarter results and raised guidance for the first quarter.
BlackBerry maker Research in Motion (RIMM: Research, Estimates), a palmOne rival, is also enjoying a happy 2004, with shares up 75 percent. And two companies that make wireless modems used in handheld devices have surged as well. Sierra Wireless (SWIR: Research, Estimates) has more than doubled while Novatel Wireless (NVTL: Research, Estimates) has more than tripled.
And in the land of security stocks, stun gun maker Taser (TASR: Research, Estimates) is up 121 percent. (The stock shot up 18 percent Monday after raising its 2004 sales outlook.) Facial recognition technology developer Viisage (VISG: Research, Estimates) has soared 170 percent and IPIX (IPIX: Research, Estimates), which makes video surveillance equipment, has skyrocketed an eye-popping 580 percent!
By way of comparison, the Nasdaq is down about 1 percent for the year, and several large cap tech bellwethers, including Intel, Texas Instruments and EMC, are sporting double-digit percentage losses.
Stop the insanity!
Now don't get me wrong. Many of these companies have extremely robust growth outlooks. Search related ads are all the rage these days. Ask Jeeves' earnings are expected to increase by 160 percent this year, for example.
And palmOne's new guidance -- it now expects sales to increase between 27 percent and 36 percent next year -- shows that reports of the demise of the PDA have been greatly exaggerated.
But what's worrisome is that investors seem to be cavalierly dismissing valuations to blindly chase momentum. Ask Jeeves and palmOne both trade for more than 30 times earnings estimates...and that makes them among the cheaper of this year's crop of hot tech stocks.
Want to be really shocked by Taser? Check this out. The stock trades at 60 times 2004 earnings projections. Novatel Wireless has a P/E of 80 times calendar 2004 earnings. The higher a company's P/E is, the greater the expectations are. And momentum stocks have a way of crashing and burning when they miss estimates.
Then there's the two most egregious examples of a return to late 90's froth: Mamma.com and IPIX.
Mamma.com is a tiny company with no analyst coverage. Sales in the first quarter were just $4.1 million. So Mamma.com isn't even big enough to be considered a formidable threat to Ask Jeeves or LookSmart let alone a Yahoo! or Google. Nonetheless, the stock trades at 172 times trailing earnings.
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IPIX is an even worse case of speculators running amok. The stock lately has routinely found itself in the list of Nasdaq's most actively traded stocks even though there are only 15.7 million shares outstanding. Cisco Systems, another high volume Nasdaq stock, has 6.8 billion shares outstanding.
The company's revenue base is even more Lilliputian than Mamma.com's, with sales of just $722,000 in the first quarter. IPIX also posted a net loss of $3.6 million.
But who needs profits when you have an extremely active public relations team? IPIX spits out press releases as if they were watermelon pits. This month alone, the company has issued 14 of them.
And there's no greater friend to a momentum investor than a press release. News, regardless of how innocuous it may be (one of this month's IPIX releases simply announced that its video surveillance systems were being used at the recent G8 summit), is like manna from heaven to people buying and selling stocks with small floats like IPIX.
But that's trading, not investing. For longer-term investors trying to figure out how to play the tech sector for the remainder of the year and beyond, a good place to start is by avoiding most of this year's big gainers.
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