April 09, 2009, 5:27 PM — Technology stocks have performed unusually well so far in 2009, and many analysts believe the tech outlook remains sunny. But investors should know that tech stocks offer different risks and rewards than those in other sectors. Some considerations:
1. LOWER YOUR DIVIDEND EXPECTATIONS: Established companies in traditional industries are the most likely to pay dividends to investors looking for steady income from their stocks. Tech companies are less likely to do so because they're usually faster-growing, and prefer to put extra cash to work rather than paying dividends.
2. USE A DIFFERENT YARDSTICK: A common tool to gauge whether a stock is worth buying is its price-to-earnings ratio. A P/E ratio is a stock's current price divided by the underlying company's earnings per share over the prior 12 months; the lower the P/E ratio, the cheaper the stock is considered. A ratio of 15 has historically been a rough threshold to determine whether a stock is cheap or expensive, although most stocks these days are trading below that level. For value stocks that lack strong growth potential, expect P/E ratios below 15. Tech stocks usually fall into the growth category, so they usually trade higher than 15. However, because of the recent market meltdown, some established tech companies have been trading at discounts ? Microsoft, for example, has a current P/E ratio of around 10. But for younger, fast-growing tech companies, it's not unusual to see P/E ratios of 30 or more.
3. BRACE FOR VOLATILITY: The late 1990s dot-com boom and resulting bust showed how volatile tech stocks can be. These days, you can still expect younger tech companies' stocks to take a bumpy ride. But many larger tech stocks are no more volatile these days than those of companies outside tech.
4. EXPECT CURRENCY RISK: Many big U.S. tech companies rely heavily on overseas sales. That means profits shift along with fluctuations in the dollar's value against foreign currencies. For example, a stronger U.S. dollar makes goods more expensive for foreign buyers, which can hurt overseas sales.
5. PREPARE TO GET LEAN: Technology's relentless advance puts tech companies under continual pressure. Many tech companies can quickly fall behind if they don't constantly get leaner and improve products.
