RedHerring. Top 10 stocks for 1999 [GSTRF in excellent company]
[djane note: RedHerring is a very influential Silicon Valley mag with particular expertise in venture capital and IPOs.]
By Peter D. Henig
Red Herring Online
February 5, 1999
You can find this article at: herring.com
Investors have
become accustomed
to spectacular profits
in their portfolios. In
1998 the Nasdaq composite index gained a record 39.6
percent, and the Standard & Poor 500 Index was up
26.7 percent. Technology stocks continued to set
record highs, while market valuations maintained their
climb into uncharted territories.
Which makes picking
a list of top 10 stocks
for 1999 that much
more difficult. Will
the Internet continue
its ride ever higher
amid wild investor
speculation? Can the
crown jewels of
large-cap tech, like
Lucent Technologies
(LU), Cisco Systems
(CSCO), and Intel
(INTC), continue
their rise unabated?
Will small-cap stocks
ever stage a
comeback, finally offering value opportunities in a
market where cheap stocks are as hard to find as
Internet companies making money?
Troubling questions to stumble around, especially when
trying to select a basket of stocks that are representative
of a cross-section of the high-tech industry, yet still have
plenty of upside potential.
LET'S DIVE IN
We ran this exercise last year, too. Our top 10 list for
1998, which registered an end-of-year gain of 86.1
percent, held many of the market's biggest winners,
including Microsoft (MSFT), IBM (IBM), Yahoo
(YHOO), and Lucent (LU). And while we were
criticized for playing it safe by going with some of the
biggest names in the technology business, we felt then --
as we feel now -- that it never hurts to buy quality,
especially with the markets and the international
economies in the state they're in.
That's why we predict for 1999, just as we had in 1998,
that volatility and uncertainty will be the watchwords of
the market, yielding yet another bumpy ride for investors
committed to investing in tech.
This year, we are choosing a healthy portion of
high-growth large-cap stocks, betting heavily on
telecommunications, moderately on wireless and satellite
communications, slightly on media, and stepping ever so
gingerly into the Internet.
Top picks/Also Consider
1. America Online/Yahoo
2. Broadcom/Intel
3. CMGI/Bluefly.com
4. Globalstar/WinStar
5. Cisco Systems/Lucent Technologies
6. Nokia/Compaq
7. Orbital Sciences/International FiberCom
8. Sun Microsystems/Spyglass
9. Time Warner/@Home Network
10. AT&T/MCI WorldCom
__________________________________________________________
How we picked 'em
Red Herring Online
February 5, 1999
The hardest part about picking 10 top stocks is not in
selecting what goes on the list, but rather what's left off.
Cisco or Lucent? Good luck choosing between those
two.
Is Microsoft's desktop market still worth a buy? The
Justice Department gets first crack there.
Is there any upside left in Internet mania? Forecasting
earnings in 2005 just isn't our bag.
Should we choose small-cap or large? Maybe we
should swing both ways.
These aren't just tough questions for us alone; they're the
same ones Wall Street wrestles with each day.
Still, certain criteria, like picking companies with strong
earnings growth, quality management teams, and
leadership positions in their sectors -- boring as they
may be -- always seem to make a stock come out on
top. And because of that, they're the standards we're
sticking to for 1999, with a few high-flying broadband
and satellite plays thrown in just to keep things
interesting.
BE NOT FOOLED
According to Chuck Hill, director of research for First
Call, technology analysts "still tend to see everything
through rose-colored glasses."
And why not? Technology is, by all measures, the one
growth industry left in America that's poised to break
out further as it invades markets the world over.
Because of this, Mr. Hill says analysts are estimating
1999 earnings growth up 40 percent in computers, up
45 percent in communications equipment, up 45 percent
in semiconductors, and up 21 percent in software.
"Are the 1999 estimates of huge gains realistic? That's
the major question mark for the second half of 1999,"
says the research director. He agrees that the first half of
the year should remain on a fairly stable upturn.
That's fine with us. With companies like Cisco (CSCO),
Broadcom (BRCM), Nokia (NOK.A), and Sun
Microsystems (SUNW) on our list, we're confident that,
even if analysts' predictions fall short, these companies
will still turn in solid performances. Their products and
services are that good, and their businesses are that
essential to the new Internet economy.
SAFETY IN NUMBERS
Not that analyst predictions can't turn out to be
fabulously wrong.
For example, according to Mr. Hill, industry analysts
had forecast 1998 earnings growth from continuing
operations for the S&P 500 at 13.9 percent, while
market strategists had forecast growth of 6.7 percent.
Where did we wind up? A lowly 2.4 percent.
"Usually we end up somewhere between the two
estimates, but not in 1998," says Mr. Hill. "That year
represented a sea change."
With that sea change in consideration, and being
ever-mindful that the markets have already performed
well beyond all reasonably bullish expectations, we
couldn't help but play it safe when selecting our core top
10 stocks. Strong earnings, large companies, quality
management teams, dominant market positions: That's
how we chose 'em.
Do these criteria deserve a big "duh"? Sure. But when
looking into 1999, a year that most Wall Streeters have
already predicted could be more volatile than 1998,
we'd rather be protected by solid fundamentals than be
caught short by a major downside move with nothing to
back up valuations.
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