Sunday, May 15, 2005

The second best sector

I mentioned biotech as the best sector to invest now if you are investing for the long term.

The next best bet is tech, specifically small software vendors. Did I hear an ouch ?

The tech sector has definitely matured as an investing area. Icahn's recently publicized interest in tech firms is proof of this.

Unlike in biotech, one cannot depend on insider buying to flash a buy signal. After all, tech is where generous (too generous, if you ask me - almost a scam when they are not being expensed) options are part of the compensation. You have to use book value and possible strategic value for the eventual buyer - very hard to do. In many cases, I try to limit myself to software that I have actually used and where I can see a potential buyer.

Many of these small software companies have suffered valuation blowups alongside their dotcom cousins. Most deserve better. I am hoping that an enterprise buyer or the market itself will eventually see value in most of these.

I have mentioned a few of them in earlier posts. These include companies like Liveperson (LPSN), Actuate (ACTU), SupportSoft (SPRT), Entrust (ENTU), Visual Networks (VNWK) , Stellent (STEL) and SeeBeyond (SBYN). I own shares in all of them. This list is incomplete - the entire list will likely contain around 200 or more. I believe that atleast 70% of them will be bought out over the next couple of years.


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