Don't know about being an institution, but the folks that make Excedrin probably like me <gggg>. On a more serious note, today's Heard on the Street column is about the PC sector...
Regards,
John
Heard on the Street
Fund Manager Turns Un-PC,
Switches to Network Stocks
By ROBERT MCGOUGH
Staff Reporter of THE WALL STREET JOURNAL
Charles "Chip" Morris, who manages $18 billion in technology stocks at T. Rowe Price Associates, says it's time to leave his friends behind.
And what good friends they have been: Dell Computer, Intel and Microsoft, which Mr. Morris calls "the profit troika" of personal computers, have powered the portfolios of technology investors to enormous gains in the past decade.
But in recent months, as the Nasdaq Stock Market and the big technology issues that dominate it have plunged, Mr. Morris has been selling these stocks. He still owns shares of Dell and Microsoft, but nowhere near as much. In the first quarter alone, according to T. Rowe Price filings, the firm sold four million shares of Intel, bringing its holdings down below seven million shares. And Mr. Morris says his portfolio has sold all its remaining Intel shares since March. (Other T. Rowe Price managers own these stocks in portfolios Mr. Morris doesn't manage.)
In their place, Mr. Morris has been buying smaller tech companies that are focused more on communications, networking and the Internet than the personal computer. Among them are Sun Microsystems, Texas Instruments and Oracle. The newcomers are more expensive: Oracle sells for about 99 times the 80 cents analysts estimate it will earn in its May 2001 fiscal year. Microsoft sells for about 37 times consensus earnings of $1.88 for the June 2001 fiscal year.
Why has Mr. Morris, 37 years old, overhauled his huge tech portfolio? Mr. Morris says he had "a sick feeling in my stomach that we were six to 12 months beyond an inflection point" in technology. That inflection point: "In Darwinian evolution, the epicenter of technology is shifting away from the PC, " Mr. Morris says. Instead, "the big thing in the next 10 years is going to be communications, not computing," he says.
Other investors and analysts say Mr. Morris is grappling with a key issue for tech stocks: How will the old heroes of technology fare as the focus shifts away from the desktop and toward networks, wireless and other forms of communications? But Mr. Morris's portfolio shift is provocative because of its timing and extreme nature.
"I do think the concept makes sense," says Kevin McCarthy, a computer analyst at Donaldson, Lufkin & Jenrette. "There is a new wave of computing -- Internet-centric computing." But Mr. McCarthy thinks the firms dominating the PC business will grab a big slice of the new Internet pie. "It's not clear that the old companies lose and the new companies win," he says.
Mr. Morris runs the $13 billion T. Rowe Price Science & Technology Fund, the largest technology-oriented mutual fund around. The fund chalked up a gain of 101% in 1999-not among the top performers in that manic year for tech stocks, but a strong gain for such a huge fund. Moreover, Mr. Morris made his gains with little help from investing in momentum stocks and the profitless Internet start-ups that powered some smaller funds to bigger gains. Mr. Morris also manages roughly $5 billion in separate accounts, so he's managing one of the larger pools of pure-technology money.
Fear got Mr. Morris to make radical changes -- fear of falling behind the curve. Smaller funds could quickly switch out of old tech into new tech, but not his massive portfolio.
He saw the technology landscape shift once before, in the mid-1980s, shortly after he joined T. Rowe Price. At that time, the minicomputer bestrode the technology landscape. Companies such as Digital Equipment had reaped huge gains for grateful investors. Mr. Morris recalls the stock of Digital selling for $200 a share and the company "taking people out on the QE-II in Boston." Eventually, Compaq Computer, the upstart maker of PC clones, bought a much-diminished Digital.
Back then Mr. Morris was a newcomer to investing -- but that proved an advantage. "For me, getting into the business in 1987, I had no problem looking at Burroughs and Sperry and Data General as companies that were not going to be key companies in the future," he says. Minicomputers remained a big business, but the growth, and the stock-market gains, went to the personal-computer companies.
Now, he wonders if a parallel situation hasn't emerged. "It would be easy to continue buying these large-cap, client-server-centric companies" focused on the PC business, he says. "I know these companies, and it's easy to get lots of money invested in them." But Mr. Morris thought that if he were a brand-new analyst, "I might say, 'Oh, of course you want Webcentric companies in your portfolio because it's over for the PC.' "
Already, there are some signs of struggle in the PC business. Several of the largest PC makers in recent years, including International Business Machines and the struggling NEC Corp. unit Packard Bell NEC have lost money on PCs. Compaq lost money on corporate PCs in the first quarter. While Dell is doing well, "it calls into question the sustainability of growth and profits for all industry players."
The communications troika of Oracle, Texas Instruments and Sun Microsystems matches up neatly with the PC-profit troika in his mind. Oracle makes database software widely used on the Internet, making it the online equivalent of Microsoft. Texas Instruments, which has a booming business in analog chips and digital-signal processors that are sold to communications companies, seems comparable to Intel. Sun Microsystems, the surging maker of Internet servers, is similar to Dell. In the first quarter of this year, all three of the communications-centric firms had faster earnings growth than their PC counterparts.
Other, smaller stocks that fit the communications theme for Mr. Morris, and whose shares T. Rowe Price has bought, include Ariba, which makes software for Web exchanges; VeriSign, an Internet security firm; American Micro Circuits, which makes telecommunications chips; and JDS Uniphase, which makes optical networking equipment.
Risks abound in his strategic shift. The stocks he has been buying are more expensive, and more volatile. If tech stocks resume their slide of recent weeks, they will probably suffer more than the old standards. They would be harder to sell in a bad market than the broader, deeper stocks he's been exiting. "It could be a massive head fake, and the PC is still the place to make money," admits Mr. Morris, who says he loses sleep "all the time."
While many technology investors agree that the focus is shifting to communications, they wonder if Mr. Morris is shortchanging the old guard. "I do agree that the PC market has matured in terms of innovation," says Jim Chen, a portfolio manager at Roger Engemann & Associates. But "the PC industry is seeing very strong growth this year," and "I don't want to be out of that."
Moreover, says DLJ's Mr. McCarthy, Dell and Compaq are pouring their energy into Internet servers. Microsoft, with its Windows 2000 operating system, has an improved operating system for "fault-tolerant" Internet use. And the Internet itself is driving demand for more Intel processors.
Mr. Morris doesn't disagree that the PC giants are grabbing for Internet and communications business. "But it's a function of baggage," he says. How much will their baggage in desktop computing drag down their growth in network and Internet computing? he asks. He has placed his bets, he says, but that remains "the $100 billion question." |
