Rational Investing: Technology not death knell for Old Economy

There has been a lot of talk in the press about the difference between the "Old Economy" and the "New Economy," with much of it swirling around the technology growth that is perceived as sounding the death knell for the companies perceived to be in the Old Economy.

There is no arguing the fact that technology is changing the way business is being done, and there will certainly be casualties among companies, both traditional and technology-focused, but as one market analyst put it, "I don't think we are all going to be sitting hungry and naked in a dark room spending all day on the Internet."

Good point.

Is it likely that we will no longer need clothing, food and utilities? From the way the market has treated companies that provide those services, one would think so.

Jack Welch, chairman and chief executive officer of General Electric (and arguably the most respected corporate leader in this country), had another way of looking at the situation, one with which we agree. His contention is that the Old Economy companies are the ones that have the most to gain as they embrace technology that will allow them to improve productivity.

Yes, technology is here to stay, but we still need research and development, manufacturing, and distribution of goods and services.

Companies that function efficiently in these areas, whether Old Economy or otherwise, will grow market share and earnings.

Our "Candidate for Purchase" list increasingly contains names that have been considered growth issues, but which, as a result of market volatility, are now within value parameters. We are seeing the best of both worlds growth at value prices, and we urge you to take advantage of this unusual situation.

Call your broker and have him begin your selection process by screening his database for issues with earnings growth rates greater than their price/earnings ratio. If you want to be more aggressive than that, screen for issues with market prices that produce a price/earnings ratio that is equal to or less than 1.5 times the earnings growth rate.

Look for sales growth, with an emphasis on unit sales growth in order to avoid a situation in which increasing quarterly or annual sales figures are created solely through price increases.

These screens will not reveal the next "high flyer" among many of the technology issues (especially the Internet names). Why? Because to have a price-to-earnings ratio a company must have earnings, a fact seemingly overlooked by many traders and speculators (notice I did not call them investors).

Projecting a sales or earnings growth rate for more than a couple of quarters is not an easy task.

Be cautious of any issues that are research recommendations that rely heavily on projections of sales and earnings years down the road.

Work with your financial professional to limit your list to no more than 20 issues, then go down the list asking yourself of each stock, "If I had the money to do it, would I buy the whole company?" If your answer is not "yes," forget that issue and go to the next.

If you are a serious investor, when you have your final list of stocks assembled buy them. Don't try to second-guess the market and whether it will be up or down over the next few days or weeks or months. And don't be impatient.

You are not assembling a portfolio for overnight success you are acquiring ownership of good companies with the idea of holding them as long as the reasons for which you bought them remain valid.

Have patience.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via The Springfield Business Journal, 313 Park Central West, 65806 or by e-mail at sbj@sbj.net.)