Interesting read. I particularly agree with the last paragraph which I highlighted in bold.
I copy this from AOL- Money Basics: Departments: The Future Is Now (presented by SmartMoney.com)
Here is the direct link to the article:
university.smartmoney.com
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The Future is Now
IN THE WORLD of technology mutual funds, there are two types of managers: Those who grab hold of a rising stock and hang on until it starts to stutter, and visionary managers, who buy stocks based on a view of how technology will be used in the future. John Leo, the 38-year-old manager of Northern Technology, is one of the latter. And it has paid off in spades for investors. Since the fund's April 1996 launch, Leo has posted a 75% average annualized return for Northern Technology. That compares with 44.2% for the Nasdaq index and 50% for the average technology fund.
Over the past four years, Leo's fund has been out in front of just about every trend to hit the technology sector. Late in 1998, he was among the first to notice the migration from a PC-centric market - one that favored Microsoft and Intel- to an Internet-centric universe. As a result, he moved into semiconductor and telecom-equipment makers, like PMC Sierra and JDS Uniphase. Those moves led to a heady 192% gain over the past 12 months. Needless to say, investors have been impressed by Leo's performance. The $2.8 billion fund is getting about $5 million in new investments daily.
How does Leo decide where to put those millions? He starts with a vision of future technological trends, then looks for the leaders in those fields. Price is almost incidental. In fact, the fund's average price/earnings and price/book ratios (52 and 16, respectively) are enough to send a value-fund manager into convulsions. "Valuation has been a much less meaningful predictor of stock prices in the past year or so," he says. "Stock activity has been driven more by growth potential and market analysis than by valuation. It's down in the pecking order."
Where does Leo get his vision? By reading the work of futurists like George Gilder. "I try to get my hands on whatever he puts out," says the fund manager, who may be the first on Amazon.com to order a copy of Gilder's upcoming novel "Telecosm: How Infinite Bandwidth Will Revolutionize Our World." Gilder is also the author of "Life After Television" and a columnist for Forbes. Leo also closely follows the research of Arnie Berman, the chief strategist at investment-banking boutique SoundView Technology Group. What Leo doesn't recommend is listening to the online mobs. "I would try very hard not to get too caught up in bulletin-board commentary," he warns.
Leo also spends lots of time visiting with the management of the technology companies he owns, and those he doesn't own. Over the past six months, he figures he's talked to about 150 chief executives, chief technology officers, chief financial officers and so on. Unlike the analysts on Wall Street, these are the people with first-hand knowledge of their markets.
Once Leo identifies a trend, he looks for companies with dominant shares of that market, like Exodus Communications in Internet networking solutions and Ariba in the business-to-business Internet field. In a new field like B2B, he will often start with small positions, then add more as the leadership becomes clear. For instance, Leo bought a small position in BEA Systems last year. Then, when BEA purchased competitor WebLogic last October- adding to its Internet production suite- Leo increased his position in the stock. BEA sells software that helps companies build their e-commerce operations.
And Leo wouldn't be earning his salary if he didn't read corporate financial statements. What's he looking for? Revenue growth, of course. Typically, he doesn't apply a minimum growth rate for the companies he selects because subsectors within technology grow at different rates. But they are all growing pretty fast. For instance, portfolio holding Applied Micro Circuits, which makes chips that facilitate broadband Internet applications, has seen its revenue climb about 50% in the past year. Another example is Tibco Software, a networking software company similar to BEA Systems. Tibco recently announced that Cisco Systems will build Tibco Software into its routers. As a result, Leo expects the company's annual revenue growth rate to increase significantly.
In addition to high revenue growth, Leo looks for improving operating profit margins. To get that figure he divides a company's operating profit (earnings before sales and administration costs and research and development) by its total revenue. This ratio is a measure of how much of a company's revenue is available for investment and expansion once it covers its operating expenses. Says he, "I would argue that if you find a company that is increasing its operating margins on a regular quarterly basis, you're going to have a hard time losing money in that stock."
Leo points to JDS Uniphase as an example. Over the past eight quarters, the company's operating profit margin has risen from 13% to 23% as it has raised prices on its filters and amplifiers for fiber-optic services.
OK. So now all you need to know is whether the technology sector will continue to boom. After all, there's no sense starting now if the party's about to end, right? Here's Leo's take: "I would argue that we're still in the early innings of the development of a lot of the Internet-centric computing paradigm. Despite some of the big moves some of these stocks have made, the real big winners- and we don't know who they are yet- are still going to make investors a lot of money over the next five years. Our challenge is to figure out which ones those are." He makes it sound so easy.
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Will ATCO be one of the real big winners over the next five years in the technology sector???? I am betting that it is. :-)
Cheers!
btw: If John Leo is a visionary manager, does it make us visionary investors?
Double Cheers!!
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