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Mon, May 27, 2002 - Page 21 News List

US technology stocks still not drawing a crowd


Jonathan Cohen, the director of investor relations at Mercator Software, has received several calls recently from portfolio managers wanting to "kick the tires" of that small company, which helps other businesses integrate their computer systems.

Some professional investors have taken the trouble to study the client lists of the company, which is based in Wilton, Connecticut, and to scrutinize its financial statements, Cohen said. But that has not led to heightened demand for its stock, which is languishing at US$2.35 a share, down from a high of almost US$150 in early 2000.

Many investors have been studying small and midsize high-technology companies like Mercator, hoping to uncover a stock that will soar whenever the two-year tech slump ends. But there has hardly been a stampede back into the sector. With the pain of recent losses still fresh, many professionals are especially cautious, demanding lean operations, clean balance sheets, substantial cash reserves and significant market share in companies' core businesses.

"I want to find a company that has aligned itself with a major trend, has a clean story and knows what it wants to be when it grows up," said Jeff Bernstein, co-manager of the ING Midcap Opportunities fund. He is based in New York with ING Investments, a unit of ING, the Dutch investment bank.

Investing in a technology stock today requires "stepping back and looking at the whole landscape to see where dollars are being spent right now," said Hank Hagey, an analyst on the technology team of Citigroup Asset Management.

Mercator has been hurt by the fact that companies have not been spending heavily on information technology, acknowledged Kenneth Hall, its chief financial officer. "We can't control how long the information technology recession will last," Hall said. "But we can control our costs and cash flow to weather these times and do enough research and development to be in a strong position to recapture revenues" when higher spending resumes.

Adequate cash reserves

* Ultratech Stepper, a leader in technology to solder wires to microchips in flat panel displays and mobile communication devices.

* Forrester Research, a technology consulting company in Cambridge, Massachusetts.

Now run by a management team hired in January 2001, Mercator raised US$16 million cash from private investors in December and reduced its work force by 29 percent. It cut its negative cash flow from operations to US$650,000 in the first quarter from US$8.1 million in the year-earlier period. The time that its customers take to pay bills, an important consideration for tech companies, has fallen to 63 days, on average, from 107.

Scary declines

Carl Palmieri, a private investor who runs a computer distribution firm in Bridgeport, Connecticut, said he started buying Mercator stock 18 months ago; in that time, the stock once dropped to US$0.95 a share. Palmieri said that he now owns 44,000 shares and that he expects to buy an additional 20,000 in the next month.

"I've played with technology stocks in the past, but I think at this point there are software stocks that are undervalued, especially in system integration, which is still in its infancy," he said. He is impressed, he added, with Mercator's client list, which includes IBM, Nestle and major health care and banking companies.

The stock rallied briefly to US$10.15 in January, but much of its recent fall can be attributed to the company's declining revenue, which slipped to US$27.4 million in the first quarter of 2002 from US$28.7 million in the period last year.

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