Worth reading (I like this guy-- been a good thinker)
The Bottom Is Close, but Not Close Enough
By Jon D. Markman
Managing Editor, MSN MoneyCentral
6/29/01 9:45 AM ET
Close doesn't cut it in most disciplines. Play the wrong note in a piano recital
and the audience hoots you off stage. Pitch a ball a fraction of an inch off the
plate with the bases loaded and you walk in the game-winning run.
But in long-term investing, plenty of experts believe that getting close to the
best possible price for a stock can be good enough. Why wait for Oracle
(ORCL:Nasdaq - news - commentary) to go any lower, the argument goes,
when it's already 60% off its high? Just buy it now and hold it for 10 years.
Don't try to time the bottom.
If you look back at selected rough spots in the last two decades of the bull
market, the proponents of buy-big-caps-now-and-fuggedaboutit seem to have
a good point. But the truth is, it all depends on which rough spots you looked
at and how long you were willing to wait to be right. That school would have
been correct about, let's say, drug giant Merck (MRK:NYSE - news -
commentary) in the early 1990s after a two-year soft spot, but wrong about
General Electric (GE:NYSE - news - commentary) for the entire 1970s,
when it was essentially flat from 1971 to 1981.
Indeed, the historical record suggests that impulsively going long the big
techs right now might be the financial equivalent of those stupid stunts on
NBC's new reality TV show, "Fear Factor." Except there's no prize at the end.
And you're not wearing protective gear. And you probably don't have
insurance.
But don't take my word for it. Two weeks ago, I let you hear from hedge fund
manager Mr. P, who is a bit removed from the fray considering that he mostly
trades index, bond and currency futures. Let's hear now from three veteran,
tech-focused money managers from around the country, one from the East,
one from the Midwest and one from the West.
Betting There Won't be a Depression
Mr. West Coast is my straw man, the most sanguine of the bunch. He
represents the hopeful crowd. Henry Hewitt, manager of the Light Revolution
Fund, has lit up his rival tech managers since the early 1990s, outpacing
most competitors and the Nasdaq Composite by buying profitable, large-cap
growth stocks trading at what he considers to be relatively low valuations.
"Every other tech fund manager is trying to buy the next Cisco Systems
(CSCO:Nasdaq - news - commentary) at 25 cents, but that's too hard," he
says. "I don't know how to do it, and judging from their performance figures,
neither do they. I stick with large profitable leaders and limit myself to one
enormous blunder per year."
His one enormous blunder over the past year, he admits, was Palm
(PALM:Nasdaq - news - commentary), but that leaves his card open to be
right on everything else. And his attitude today is that you're going to tick off
your incredulous grandchildren if you don't have a good explanation for why
you didn't buy the real Cisco Systems in 2001 at around $15, or Intel
(INTC:Nasdaq - news - commentary) around $25 or Texas Instruments
(TXN:NYSE - news - commentary) around $35. "If it takes Cisco 10 years to
get back to $80 from here, you'll make more than 15% on your money," he
insists. "And absolutely the only way that doesn't happen is if we're on the
verge of a depression."
A former Latin professor and Merrill Lynch broker, Hewitt invests his fund in
a list of 65 stocks that he believes are at the heart of the information
revolution. He rebalances the stocks annually, so it's never overweighted in a
couple of names. He draws his current optimism primarily from the notion that
excitement over the powerful new 64-bit microprocessor from Intel combined
with a powerful new operating system from Microsoft (MSFT:Nasdaq - news -
commentary) will serve to ignite a PC-buying spree among both consumers
and businesses that will jump-start all technology stocks. (Editor's note:
Microsoft is the parent of MSN MoneyCentral.) Echoing a line attributed to
tech pundit and fund manager Michael Murphy, he declares that PC owners
are about to "leap from a Ferrari into a Lear Jet" -- and that excitement will
lead to the purchase of more software and hardware accessories and Internet
infrastructure than ever.
I must admit it's refreshing to hear someone that optimistic. So what does he
like right now? His favorite is semiconductor-equipment maker Applied
Materials (AMAT:Nasdaq - news - commentary). He calls it one of the
best-managed companies in America and notes it is trading at half its
52-week high with a price-to-earnings ratio (P/E) on trailing 12-month earnings
of 20. "If you agree with me that a depression is a low-probability event, then
you need to buy AMAT right now," he says.
But what if you think a depression isn't likely, but a long, drawn-out recession
is?
Three Strikes
That's the intellectual territory inhabited by Mr. Midwest. You've met him
before in this column -- it's Bret Rekas, manager of Lakeside Investment
Partners' Bull & Bear LP hedge fund in Minneapolis. Rekas knows tech
inside out from his days as an influential analyst at brokerages Robertson
Stephens and Donaldson Lufkin Jenrette, and he doesn't like anything
long right now. In fact, he's not looking for a technology recovery until the
second half of 2002, not 2001.
"Back in December, the market rallied when people said business couldn't get
worse. But it did get worse," he said. "And then the market rallied in April
when they said it couldn't get worse. But it did get worse. Now the same
people are telling you that a fourth-quarter recovery will solve everything. And
they are going to be wrong again."
Rekas thinks that tech investors are just going to stop speculating on a
recovery at some point this summer and just park their funds outside of the
sector until they see "the whites of their eyes" -- a real, documentable pickup
in technology buying by businesses and consumers. He scoffs at the notion
that it doesn't matter whether you buy a stock like IBM (IBM:NYSE - news -
commentary) at its current price near $112 or at less than $90 maybe over the
summer. "Using the 'long term' as a crutch to just buy now and wait for a
recovery is just an excuse not to think," he says. "It's pure ignorance. It's
delusional."
The problem: He thinks tech companies' earnings will continue to deteriorate
well into next year as business adjusts back to a pre-1998 level -- that is,
before the IPO-fed bubble of telecom-, Y2K- and dot-com-related buying. This
means that no level of low P/E ratio is safe until the E, or earnings, part of the
equation stabilizes at a sustainable rate. And it means that he believes
companies like Juniper Networks (JNPR:Nasdaq - news - commentary) and
Siebel Systems (SEBL:Nasdaq - news - commentary) are still vastly
overpriced. "I started shorting Juniper at $191," he sniffs. "It's at $31 today,
and I have no plans to cover."
What intrigues him? It's a small list. Texas Instruments under $30; British
chipmaker ARM Holdings (ARMHY:Nasdaq ADR - news - commentary)
under $5.50, mostly because of its unassailable position as a patent holder;
and EarthLink (ELNK:Nasdaq - news - commentary) because of the buyout
potential and subscription revenue.
A Bear's Bear
Mrs. East Coast is wedged uncomfortably between Rekas and Hewitt. She's
bearish, but as a natural contrarian, she's bugged that everyone else is, too.
She won't let me name her, but let's just say she's the top technology analyst
at a very large fund for the super-rich in New York (why do the super-rich get
the best of everything?). Last September she was extremely bearish on
technology, especially semiconductors; by March she had lightened up and
confidently forecast a rally.
Now she admits she's confused. She conducts her own analysis by collecting
information bit by bit; she specializes in talking regularly with the chief
information officers of large companies across the Fortune 500 industrial
spectrum and simply asking them whether they plan to buy more or less
software and tech gear in the next 12 months. The problem today, she says,
is that 25% say they're going to spend a little bit more than last year, 25%
say they're going to spend less and 50% say there's no change in their plans.
In her view, the question of a second-half recovery thus comes down to what
you believe the "magic number" for IT spending growth will be in 2001: Will it
come in above, at or below its 20-year trend? Here are the pieces of this
puzzle: She says the long-term trend is 9% annual IT spending growth; we're
coming off a year of unprecedented 21% growth; and the historic low is 3.5%
in 1990-91.
She believes companies are not expecting a trend-matching year, but they're
also not expecting to spend nothing. So she's figuring on 4% to 6% spending
growth, a figure that buttresses the notion that sales in the fourth quarter of
2001 for the firms that sell stuff like routers and enterprise software will come
in at the low end of Wall Street's current expectations. And thus stocks that
are priced for a sharp "snapback" in that time period will get whacked.
Now aren't you sorry I asked? With apologies to Mr. Hewitt, it seems that the
only light revolution in evidence today is the circle of stars in front of dazed
investors' eyes. Close enough isn't here yet. Until managers like Mrs. East
Coast are ready to buy with conviction, the jumpy trading range of the past
few months probably continues -- with a mild downward bias. |
