Reading tech tea leaves at H&Q. SJ Mercury article
[Note: As far as I can tell, Landis sold ASND in the low 30s on the rebound in 1/98 after holding ASND/CSCC on the ride down since the 60s and missed the rise to the low 40s. He also sold his COMS and CSCO holdings in 1/98. If he truly believes the quote in the article, I guess he will also be selling his huge stake in PMCS, AMCC and other companies which make chips for the networkers.]
Posted at 4:39 p.m. PDT Sunday, April 26, 1998
BY ADAM LASHINSKY Mercury News Staff Writer
sjmercury.com
TECH STOCK investors once liked to repeat a simple investing
maxim: Buy 'em at the AEA, sell 'em at H&Q.
The loading-up signal was the American Electronics Association
annual financial conference in the late fall, and the time to bail was at
the Hambrecht & Quist Technology Conference, which begins
Monday in San Francisco.
Like many chestnuts, this one doesn't necessarily work anymore.
With a handful of tech segments already in the dumps -- don't worry,
we'll come back to the anything-but-dumpy Internet group -- it isn't
likely the whole sector is heading for a traditional summer slump.
Or is it? Signals from a handful of prominent tech-stock soothsayers,
including some normally unsure how to spell the word ''sell,'' are
decidedly downbeat.
The man of the moment is Bruce M. Lupatkin, research director for
H&Q, who'll be shepherding the conference's 300-plus presenting
companies.
Lupatkin surprisingly is gloomy for a man with a legion of sell-side
analysts working for him. He warns especially to stay away from
companies associated with personal computers, including the dreaded
PC makers themselves.
''There's the promise of a second-half rebound,'' Lupatkin says,
referring to favorable comments Intel Corp. (Nasdaq, INTC) has
made recently. ''But I believe we've heard that promise for three
years now.''
As such, Lupatkin advises that ''it's a little too early to get involved''
in stocks of companies that make or distribute PCs, disk drives or
commodity microprocessors. That includes contract manufacturers
focused on the PC industry.
Echoing that thought is Merrill Lynch & Co.'s Thomas P. Kurlak,
who recently defined for his clients what he calls a ''new era,'' a
subtle swipe at market strategist Abby Joseph Cohen of Goldman,
Sachs & Co. and others, who have argued persuasively that the old
way of evaluating stocks (based on their earnings) doesn't work these
days.
''Looking backward to the PC-centric period of 1985-96 as viewed
from the chip makers' perspective, the best years appear to be behind
us,'' Kurlak writes. Referring specifically to Intel and its competitors,
Kurlak suggests ''a new low in stock prices could occur, perhaps this
summer, as investors give up on the group due to lack of recovery.''
Some stock pickers see more reasons for hope.
Michael Murphy, a mutual fund manager and editor of the California
Technology Stock Letter in Half Moon Bay, says some disk-drive
makers are ready to rebound.
''Technology is driven more by product cycles than economic
cycles,'' he says. Disk drives fell victim to the glut of PCs. But, as
Murphy says, ''even sub-$1,000 PCs need a disk drive.''
Roderick R. Berry, a portfolio manager with the Robertson Stephens
Information Age Fund in San Francisco, found a reason to like
Gateway 2000 Inc. (NYSE, GTW) even before its run-up last week
around its encouraging quarterly results.
Gateway, he says, benefits from its build-to-order business model,
especially compared with Compaq Computer Corp. (NYSE,
CPQ), which got caught in the buzz saw of excess inventory.
''With Gateway you don't have the inventory issues,'' says Berry.
An area certain to come under intense scrutiny this week is
networking, a sector that's been hit by its own set of glutted-inventory
and price-cutting issues.
''I think things could get real ugly for the networking stocks in the
second half of the year,'' says Kevin Landis, a portfolio manager for
the Technology Value Fund in San Jose.
He fears that revenue growth can't keep up with falling average selling
prices and that no networking company will be immune. That includes
Cisco Systems Inc. (Nasdaq, CSCO), the only major equipment
maker not scheduled to present at H&Q. Lucent Technologies Inc.
(NYSE, LU), Bay Networks Inc. (NYSE, BAY), 3Com Corp.
(Nasdaq, COMS) and Ascend Communications Corp. (Nasdaq,
ASND) all are on the agenda.
Cisco's current quarter ends Thursday and the company is scheduled
to report earnings May 5. A disappointment by Cisco or any
indication by management that the balance between falling prices and
rising revenues will worsen undoubtedly would rattle the tech market.
Cisco, unlike Bay, 3Com and Ascend, continues to trade near its
52-week high.
And let's not forget Internet stocks. Most of the important players will
be at the conference, but they've all said most of what they have to
say as far as their financial performance in the first quarter and their
outlook. And the air already has begun to come out of their stocks as
investors balk at paying the kinds of valuations that make Yahoo Inc.
(Nasdaq, YHOO) worth more than Knight Ridder (NYSE, KRI),
publisher of the San Jose Mercury News.
So one of two scenarios is possible. Either investors at the conference
will continue being skeptical about Internet-related valuations and
chip away at their stock prices, or they'll love the enthusiasm
Internet-company CEOs nearly always display at times like this and
bid them up.
H&Q's Lupatkin laments the ''wholesale indiscriminate buying'' that's
driven up the values of many Internet stocks. That would include
companies that call themselves Internet concerns but really are in
industries like advertising, stock brokerage or travel. The businesses
will continue to boom, he says, but that doesn't mean there won't be
something of a ''sorting-out process'' with the stocks.
''I don't think you want to mess with the secondary and tertiary
players,'' he frets.
Sage counsel. But isn't that what every wise guy has been saying
about so-called Internet also-rans for at least six months?
INTEL'S UPSIDE: Intel is among the most forthcoming of
companies when it comes to disclosing and discussing its financial and
operational performance. But when it comes to the semiconductor
giant's investment portfolio, Intel is cagey at best.
Calling for comment on one of Intel's many equity investments in the
range of $5 million to $10 million, one can rely on an Intel spokesman
repeating for the umpteenth time that the company doesn't comment
except to say its portfolio is worth about $500 million.
The fact of the matter, as Morgan Stanley Dean Witter analyst Mark
Edelstone reminded clients last week, is that Intel is a major venture
capitalist, placing chips of another kind on technology craps tables
around the globe.
Edelstone reports that Intel now values its venture capital portfolio at
$750 million, but even that's probably an understatement. ''About
two-thirds of the companies in the portfolio are privately held,'' says
Edelstone, ''and we suspect a public or more current valuation of the
portfolio would provide a higher underlying value.''
Often viewed as the bullish-on-Intel counterpart to Merrill Lynch's
Kurlak (perhaps Wall Street's most vocal Intel bear), Edelstone says
Intel made more than $300 million in investments in more than 100
companies last year. He expects the chip company to double that rate
of investment this year.
Contact Adam Lashinsky at the San Jose Mercury News, 750
Ridder Park Drive, San Jose, Calif. 95190 or
siliconstreet@sjmercury .com or (408) 271-3782. |
