Telecoms get yellow flag
'Stick to small positions in your favourite
names'
Sonita Horvitch
Financial Post
Investors in high-growth global telecom stocks should move
cautiously as there could be further weakness in this sector, says
Brian Hayward, portfolio manager of Denver-based AIM GT
Global Telecommunications Fund.
"Don't jump in with both feet, but buy small positions selectively in
your favourite names," says Mr. Hayward, who has been following
telecom stocks since early 1988 when he was a senior equity
analyst at Mississippi Valley Advisors, a money manager based in
Missouri.
Mr. Hayward took on the specialist telecom fund at the
AIM/Invesco money management group earlier this year.
At a recent count, the global fund had about 78% of its holdings in
North American equities and 16% in Europe. Asia-Pacific
companies represented about 2% and the remaining 4% was in
cash.
Given the current weakness in the technology/telecom sector and
the prospects for more to come, "cash has become king," says Mr.
Hayward.
The run-up in U.S. interest rates has taken its toll on high-multiple
growth stocks.
Mr. Hayward believes that the financial markets have already priced
in a 25 basis-point hike in interest rates by the U.S. Federal
Reserve at its next policy-making meeting and there could be
another 25 basis-point increase by year-end.
As the year draws to a close, perceptions about year 2000
computer problems will escalate and this will cast a pall on
technology stocks. But, he notes, "Y2K jitters will provide an
excellent buying opportunity as the growth in this sector will persist
well beyond the year 2000."
Mr. Hayward's specialty telecom fund is positioned to take
advantage of major trends in this high-growth segment of the
economy.
The key themes here are deregulation, explosion of data traffic and
growth in wireless services.
Growth opportunities for telecom services in lesser developed
countries are another theme on his radar screen. "But we need a
strong recovery in those countries first."
His stock selection centres on companies that will benefit from these
events, but it is crucial that the companies be leaders in their field in
terms of quality of management and revenue growth.
For the column, Mr. Hayward has chosen:
- Cisco Systems Inc. (CSCO/NASDAQ), which had a recent close
of $64 1/4 and trades in a 52-week range of $69 1/4 to $20 9/16
(all figures in U.S. dollars). Based in San Jose, Calif., Cisco supplies
data networking products.
"It is the largest maker of routers -- key Internet equipment," says
Mr. Hayward. The explosive growth of data traffic driven by the
Internet is fuelling the company's sales. Among companies of its
size, Cisco enjoys the best revenue growth in the industry.
The company produced a positive earnings surprise for its fourth
quarter ended July, 1999. This encouraged analysts to bump up
their earnings estimates for the fiscal year to July, 2000, to $1 a
share from 90½ and for fiscal 2001 to $1.20, from a previous
$1.10.
He would add to on weakness:
- JDS-Uniphase Corp. (JDSU/NASDAQ) $96 7/8 ($98 3/3- $15
5/8). The San Jose, Calif.-based company -- which is the result of a
merger between JDS Fitel Inc. of Nepean, Ont., and Uniphase
Corp. of San Jose -- makes a broad range of products for the
fibre-optic communications market.
"This company is the dominant player in this business."
The demand for the combined companies' products is exceptionally
strong and is driving explosive revenue growth, Mr. Hayward says.
Another company with Canadian content, which he considers a
good prospect for the near term, is:
- AT&T Canada Inc. (TELb/TSE) $92.30 (Cdn) ($98-$23.25).
Based in Toronto, this company provides local, long-distance, data
and Internet services.
Earlier this month, British Telecommunications PLC announced it
would buy 30% of AT&T Corp.'s 31% share of AT&T Canada for
about $402-million (US) or $600-million (Cdn).
AT&T and British Telecom are aiming ultimately to take full control
of the Canadian arm of AT&T, once foreign ownership restrictions
are lifted.
Given this prospect, the "stock should hold its own, even if the rest
of the sector is weak."
He has also selected:
- MCI WorldCom Inc. (WCOM/ NASDAQ) $78 7/8 ($96
49/64-$39). Based in Clinton, Miss., the company provides
consumers and businesses with local, long-distance, Internet and
other communications services.
MCI WorldCom has the largest worldwide telecom network of all
the carriers, says Mr. Hayward. It has been growing through
acquisitions and now has a large local exchange network as well as
the largest Internet network.
In keeping with Mr. Hayward's stock selection criteria, "the
company has one of the best management teams in the business and
has very high revenue growth."
MCI WorldCom is able to command high margins because it owns
its own network. Furthermore, it is more focused on corporate
business than residential, he says, and it is the corporate business
that attracts wider margins.
The money manager sold down his holding in high-profile Internet
stock America Online Inc. (AOL/NYSE) $97 5/16 ($175 1/2-$17
1/4) in early July.
At the end of June, America Online was the largest holding in his
portfolio -- representing about 4%.
"Recent news on both the company and the industry has been
negative," he notes.
AOL's expansion in Europe, which was expected to be a key
growth driver, is being thwarted, says Mr. Hayward, by competition
from European companies offering free Internet access. |
