Telecoms, media, technology: it's still the only game in town

Despite the big fall in dot.com shares, TMT is still the only place to look for growth stocks.

Picture the scene. A policeman is walking down a dark alleyway at midnight when he spots a drunk crawling about under a solitary street lamp. He asks him what he is doing. "Looking for my keys," comes the answer. "But how do you know you lost them here," asks the policeman. "I don't," replies the drunk. "But it's the only place I can look."

Picture the scene. A policeman is walking down a dark alleyway at midnight when he spots a drunk crawling about under a solitary street lamp. He asks him what he is doing. "Looking for my keys," comes the answer. "But how do you know you lost them here," asks the policeman. "I don't," replies the drunk. "But it's the only place I can look."

The same twisted logic can be applied to the stockmarket right now. Despite the big fall in "dot.com" shares since March - and recent profit warnings from several US hi-tech giants - I continue to believe the telecoms, media and technology sector (TMT) is still the only place to look if you're hunting for growth stocks. The rest is darkness.

True, there will be plenty more sleepless nights ahead. People are still nursing losses from the sell-off in the spring, and shares prices are likely to yo-yo for some time to come. But you can narrow the odds by going either for companies that, though small, have built up a dominant position in their market or by buying an incubator fund that has a spread of core technology (not dot.com) investments.

Vislink is a classic example of the former. Under new management, it has sold off a host of dud businesses and reinvented itself as the world leader in microwave broadcasting equipment - which puts it in pole position to make the most of the switch from analogue broadcasting to digital.

In Britain, the Government now wants to switch off analogue TV in 2004, not 2006 as originally intended. So Vislink could reap rewards sooner rather than later. At 80.5p, it is valued at about £83m. Brokers Investec Henderson Crosthwaite expect it to make £4.8m pre-tax in 2001.

Then there is the incubator approach. Back in the early spring, the shares of these funds went to silly levels. Most are now back in touch with reality. The pick of the bunch is NewMedia Spark (NMS), run by former investment banker Tom Teichman and technology guru Michael Whitaker, who used to pull the strings at brokers Collins Stewart.

Anyone who attended NMS's annual meeting in London's Glasshouse Street on Tuesday was left in no doubt about the potential. After buying two other funds - including Sweden's premier e-commerce incubator - and swallowing the corporate finance house that gave birth to it, NMS has some 50 investments and £40m in cash. Combined, that lot is worth 66p a share - in line with the current share price.

But the numbers are set to change dramatically. There is a £20m-plus uplift to come from the revaluation of NMS's 7 per cent stake in Olympic Worldlink, which gears up the business potential of palmtop computers, and several other investments are going through funding rounds at prices higher than the current carrying cost. All of this will more than cover the cost of writing down some of NMS's consumer-related investments.

But, most importantly, NMS owns 96 per cent of eTV, Sweden's first interactive digital TV station (akin to OnDigital). NMS's biggest investment, eTV, is currently raising more money ahead of a stock market float next year. When that happens, eTV is likely to be valued in the hundreds of millions - dwarfing NMS's own current market value of under £200m. Exciting stuff.