MARKET COMMENT
Shares That Could Rocket

By James Carlisle
November 5, 2002

The last few weeks have seen some fireworks from the technology sector, with the FTSE techMARK 100 index gaining around 20% since its early October lows. After a couple of years of burnt fingers, it serves a reminder that shares can go up as well as down.

It's no surprise that the technology sector serves up the most volatile shares, since it's an area that combines the highest potential growth rates with the greatest uncertainty. These volatile shares are like long odds bets. The chances are that they won't come in but, if they do, they could rocket. The market should be pricing in its view of the possibility of spectacular gains, but that should make the shares likely to disappoint on the more likely outcomes. So the shares with the greatest potential upside will naturally also be the ones with the greatest potential to blow up in your face.

Sensible precautions

This doesn't mean that the bets aren't worth taking, but it does mean that you need to treat them with respect and take sensible precautions. Sensible precautions, in investment terms, means diversifying across a range of different opportunites and the riskier each individual bet, the greater the need for diversification.

In addition to backing a number of different shares, diversification needs to be achieved by investing in companies exposed to different end markets. So you might have a share that could do well if digital television takes off, another that could do well if 3G mobile phones take off and another whose fortunes are tied to the market for data management software.

The fact is, though, that there just aren't enough decent technology sectors and shares to go around and most overlap to some degree. So you'd be well advised to have the core of your portfolio made up of more predictable investments, with maybe a few of these potential high-fliers tacked on the end. Where you strike the balance will depend, of course, on how exactly you see things and your appetite for risk.

So the shares on my own list as having the potential for portfolio pyrotechnics are...

Sage (LSE: SGE), whose software could provide the key to business management solutions.

ARM Holdings (LSE: ARM), whose chip designs could provide the key to the embedded chip market.

Autonomy (LSE: AU.), whose software could provide the key to sorting the growing mass of unstructured data.

Psion (LSE: PON), whose Symbian associate could have the operating system that provides the key for the nascent 3G mobile phone market.

NXT (LSE: NTX), whose technology could provide the key to the 'twinkle in the eye' flat-panel loudspeaker market.

As you go down the list, you'll notice that the end markets become increasingly undeveloped and I'd say that the risks increase in the same way. If things go right for these companies, they could provide a spectacular display, but you should proceed very much on the basis that they probably won't.

Tell us about your favourite firework shares, or what you like or don't like about mine, on the TMF Article Feedback board.

The author holds shares in Autonomy.