thestreet.com article bullish on telecom equipment suppliers [No ASND reference]
[Note: Landis is pretty good, but he did sell ASND in the low 30s...]
Silicon Babylon: Dot.coms Are Dead.
But Long Live the Net.
By Cory Johnson
West Coast Bureau Chief
7/27/98 10:49 AM ET
SAN FRANCISCO -- Wall Street's cliche of the moment
seems to be "the sky-high valuation of Internet stocks." And
rooted in this (and every) cliche is a truth: Net stocks are
valued so richly that even true believers are hard-pressed to
make smart investments. Seasoned investors worry about
the S&P 500 trading at a less-than-conservative 1.8 times
revenue. So what's an investor think when Amazon.com
(AMZN:Nasdaq) -- a company whose long-term success is
far from a lead-pipe cinch -- is trading at 22 times revenue,
and Yahoo! (YHOO:Nasdaq) at 78 times revenue? Even
CNet (CNWK:Nasdaq), a company that reported -- gasp! -- a
profit this week, is trading at 22.3 times revenue.
No wonder Net stock investors are airsick. So despite big
earnings news, most Net stocks were flat for the week. And
traders and fund managers out here on the coast -- some of
the early cheerleaders for Net stocks -- are now looking at
the new Net stocks.
"Now you're singing my tune," said one West Coast trader
who asked not to be named. "All of my clients are looking
for some other way to play the Internet, because dot-coms
are just too scary. They're screaming short, so the 'other
Net' has been the sales pitch of the week."
Kevin Landis, of the $193 million FirstHand Technology
Value fund, is another fund manager taking a different angle.
"Amazon.com might succeed or fail, Lycos.com might clean
the clocks of Yahoo.com," says Landis. "These guys give
you a reason to use the Internet -- but good luck picking the
winners. But I'll tell you what: If there were a stock called
Internet Traffic Inc., everyone on the Street would be buying
it."
So Landis looks at companies that carry Internet traffic,
particularly advanced telecommunications companies like
Level 3 (LVLT:Nasdaq) and Qwest (QWST:Nasdaq), two
companies with more reasonable price-to-revenue ratios
(17.3 in the case of Qwest). "This is the plumbing of the
Net," says Landis. "People who own and resell bandwidth.
They're building out their networks to keep up with Internet
growth."
OK, but what about the huge expense of building those
networks as fast as the Net? Capital expenditures like that
can gobble up profits. No worries: That's when Landis digs
deeper.
"If you could listen in on the calls of a Qwest purchasing
agent," say Landis (making like Linda Tripp), "who would he
be talking to? It would be equipment makers: Nortel
(NT:NYSE), Ciena (CIEN:Nasdaq), Cisco (CSCO:Nasdaq),
Lucent (LU:NYSE) -- and nobody ever got fired for having
Cisco and Lucent in his portfolio." Indeed. Last week both
Cisco and Lucent saw outsized volume while dot-com
stocks cooled off. Adding fuel to that fire was a story in The
Wall Street Journal on Cisco and blowout earnings from
Lucent. These two companies alone brought in $1.4 billion in
profit on revenue of more than $37 billion in the last year.
OK, but nobody ever beat the Street by owning what the rest
of the Street owns. That's why Landis digs even deeper.
"I like to go one more layer down," says Landis. "Open up
the gear from Nortel, Ciena, Cisco and Lucent -- and what do
you see? You see chips from PMC Sierra (PMCS:Nasdaq),
Applied Micro Circuits (AMCC:Nasdaq), Vitesse
(VTSS:Nasdaq), Transwitch (TXCC:Nasdaq) -- now you're
singing my song."
Chips stocks, of course, have been crushed across the
board by the economic downturn in Asia (that's another Wall
Street cliche for bank runs, armed uprisings, developing
nation streets choked by smoke from burning tires...). But
there's a big difference between low-tech dynamic
random-access memory chips and the super high-end chips
from PMC Sierra. "Every time some pundit comes out and
says DRAM pricing is still really weak, all the chip stocks
fall," says Landis. "Traders on the Street don't know what's
in their portfolios, so they just sell. And that's when I buy."
Landis hasn't quite bet the farm on these chip companies,
but more than 10% of his fund is in these names, and PMC
Sierra is now his single largest holding. Landis says he's
tempted to buy more. "It's hard to double down on your
largest position," says Landis, "but I think these guys are as
close to bulletproof as a chip company can be."
Investors big and small will miss the boat if they try to avoid
Internet stocks altogether. "You've got to own them," Steve
Ross told TSC earlier this week. Ross manages a $4 billion
portfolio at Nicholas Applegate Capital Management and
his firm holds more than 28.8 million shares of PMC Sierra.
The more you believe that the Net is going to keep
exploding, says Landis, "the more those issues come to the
fore. You've just got to dig a little deeper than the average
investor."
c 1998 TheStreet.com, All Rights Reserved.
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