What on earth is going on? First, we are told the onward march of hi-tech and dot.com stocks means that old ‘fuddy-duddy’ blue-chip firms will be turfed out of the new order. So out of the FTSE-100 go Scottish & Newcastle, Hanson, PowerGen, Imperial Tobacco, Thames Water, Allied Domeq, companies which – no matter what you think of them – each deliver hundreds of millions of pounds of annual profits for their shareholders. In come Psion Baltimore Technologies, Nycomed, Amersham, Freeserve and Celltech, some of which have yet to show any kind of return to investors and are unlikely to for several years to come. Then, suddenly, the bubble bursts. The flotation in mid March of lastminute.com, the travel and holiday special offers website, may have been the catalyst for subsequent events. The shares rocketed up on the day of flotation, briefly valuing the company at more than #800m. Within days, the City marked lastminute.com back down to well below its original listing price. Perhaps more significant has been the fallout for other dot.com stocks: in many instances their share price fell too. The FTSE techMark index of hi-tech was down more than 50 to 3341 by the close of play last Thursday, a fall of almost 33% since those heady March. Three of those recent FTSE-100 newcomers face ejection from the big league next month. Closing prices earlier this month from index manager FTSE-International showed Baltimore Technologies in an automatic relegation spot below 110th place, along with telecoms firms Thus and Kingston Communications. Also flirting with danger are Psion and Celltech Group, sitting at 108th and 107th respectively. The old companies have roared back. One of the biggest gainers to date, rocketing more than 50% since its nadir in February, has been Imperial Tobacco, maker of that well-known hi-tech cigarette brand, Players Navy Cut. Hanson, which hovered at about 340p in March has now touched 480p, while Allied Domeq, which fell to 250p in March is now back up at 345p. Justin Urquhart Stewart, a director at Barclays Stockbrokers, says: ‘What we are starting to see is a divergence between individual companies in terms of how they are assessed by the City. It’s called the cold douche of reality. ‘The differentiation is far more between developmental companies, and others, both long-established ones and those less so, which are using technology to improve their businesses. The problem for developmental companies is that they are always going to be risky.’ So, have the old boys in the FTSE – and outside – finally came back into fashion? Well, yes and no. Part of the reason why the FTSE’s old-fashioned stocks can mount a recovery, while the techMARK drops is plain if you look at the volumes. Turnover in the blue chip index is the size of a luxury liner; the techMark is still in a rowing boat. Hi-tech stocks can yo-yo dramatically with relatively few shares being traded. Elissa Bayer, head of London private clients at Greig Middleton, private client stockbrokers, says: ‘Investment in new stocks has not come from the big institutions. It has come from small investors. (What we are doing is) looking at periphery stocks, such as Reuters or Pace Micros.’ Even so, Bayer believes that some old-fashioned stocks may be due for a revisit: ‘When papers like the Evening Standard query the fact that a company like lastminute.com (can be) now worth more than WH Smith, it has a point.’ She suggests investors should be looking at sectors that have been out of favour but have the opportunity to recover, such as banking or pharmaceuticals. Among company shares which could recover, Bayer singles out Lloyds TSB and either Royal Bank of Scotland, which recently won its takeover war for NatWest, or Bank of Scotland. Among pharmaceutical companies, she rates Glaxo Wellcome. At Barclays, Urquhart Stewart argues: ‘The key thing to do is look at hi-tech companies which are developing systems aimed at helping to deliver business solutions. Companies such as Mysis or Celltech, which are involved in business-to-business technology.’ Roddy Kohn, an independent financial adviser at Bristol-based Kohn Cougar, says: ‘Until some of these hi-tech stocks have established themselves as sound and viable businesses, market sentiment will see-saw. Also, I feel the presence of huge stocks, such as Vodaphone, in the FTSE, can distort overall valuations. The current FTSE is no longer a full reflection of the whole market. ‘Generally, I think if you’ve been loyal to a share because you felt it had good potential, you should stay loyal to it even if it is out of the FTSE. If you still like a particular asset and feel it’s priced cheaply, it’s logical to add some more to your portfolio. Within reason.’ Kohn does not recommend diving out of top 100 stocks per se: ‘What really matters is understanding whether those ex-FTSE blue chips have value potential to them. If they haven’t, sell up.’ Either way, how you make money in the short term may well be less important than how you position yourself for the long haul. The reality is that not all dot.coms will survive – but some blue chips won’t make it either. Spreading risk between both the oldies and – selectively – the new kids on the block may turn out to be the most sensible strategy. – Nic Cicutti is head of content at FTyourmoney.com. ?:
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