Investors Keep the Faith in Communications Chips
By Marcy Burstiner
Staff Reporter for theStreet.com
6/18/99 7:00 AM ET
SAN FRANCISCO -- Internet-related stocks started on a tear last October. Despite concerns about stratospheric valuations, many investors had enough confidence in future growth to hang on for what's turned out to be a pretty volatile ride.
What goes up usually comes down, and many of these same stocks took a tumble during this spring's selloff. The most common Internet stocks -- portals such as Yahoo! (YHOO:Nasdaq) and e-commerce companies such as Amazon.com (AMZN:Nasdaq) -- are down 30% to 70% from their April highs. But that saw didn't hold true if you were talking about communications chipmakers, as much of Wall Street is these days. These chip shares are seemingly immune from the broader tech selloffs.
The companies that make communications devices are benefiting from the growth of the Internet, but they are less risky than the higher-profile Net plays. "The growth rates aren't nearly as high as Internet stocks, but they are supported by earnings," says Ned Brines, portfolio manager with Roger Engemann & Associates.
Still, valuations of communications chipmakers are no longer the bargains they were last summer, when Applied Micro Circuits (AMCC:Nasdaq), for example, was trading at less than 30 times trailing earnings instead of the 111 times it is now.
"The prices seem on the high end of reasonable," says Kevin Landis, portfolio manager of Firsthand Technology Value Fund which manages $187 million. "But these are companies that are on 50% growth rates. The fundamentals keep getting better. That's the nice thing about a growth stock in a growth industry."
So a lofty stock like RF Micro (RFMD:Nasdaq), trading at 113 times trailing earnings, is trading at 62 times its estimated earnings for its fiscal year ending March 2000. And TranSwitch's (TXCC:Nasdaq) P/E, which stands at 144 based on 1998 earnings, comes down to 67 when based on First Call estimates for calendar year 1999.
Landis has earned some credibility in this sector. He spotted the potential early, investing in a spate of communications chips. They have helped push the fund up 53% this year. Even if he had waited, Landis says, he would still buy now.
Communications chipmakers have long been kind to the faithful. Back in November, Vitesse (VTSS:Nasdaq), TranSwitch, RF Micro and Applied Micro Circuits had seen such a spectacular rally that investors wondered if it was time to bail out. From Oct. 8 to the end of November, each of these four stocks rose between 82% and 116%, compared with a 42% gain for the Nasdaq Composite index.
Far from exhausting itself, that rally was only getting started. Since Nov. 27, Vitesse is up another 60%, TranSwitch up 82%, Applied Micro up 94%, and RF Micro up 280%. PMC-Sierra (PMCS:Nasdaq), another recent darling, is up 105% in the same period. The Nasdaq is up only 22%.
Chart appears here
Defying the Net Selloff
AMCC vs. TheStreet.com Internet Sector index,
April 12 to June 16
Even after that second round of gains, investors aren't wondering this time. They are staying put as they watch fund managers move out of Internet stocks like Inktomi (INKT:Nasdaq) and into communications chips.
"We've been riding our positions," says Brines. His firm, Roger Engemann, manages about $8.3 billion in assets and has sizable positions in Applied Micro as well as Micrel (MCRL:Nasdaq) and Texas Instruments (TXN:NYSE).
Some investors are only gaining more conviction during this rally. Shaker Investments, which manages about $500 million in assets, has held Vitesse, TranSwitch, Uniphase (UNPH:Nasdaq) and RF Micro since last summer. But Managing Director Raymond Rund says he became more convinced of their future growth potential after he talked to representatives of communications carriers at the Supercomm '99 trade show in Atlanta last week.
"The PC market drove semiconductors in prior years, and I think for the next few years it will be communications that drives it," he says. "This will be a multiyear expansion; there is a tremendous amount of infrastructure being built and a tremendous amount of bandwidth being added."
Comforted by the security of the earnings and the promising outlook, those who have faithfully stuck by the communications-chip sector will continue to do so. Lutheran Brotherhood Management bought into digital signal processor maker Texas Instruments late -- in January, when it cost 100 a share. The stock has already increased more than 30% so far, and portfolio manager Jim Walline says he's a long-term bull on the stock now.
"We are a new convert to the story. We are a believer," Walline says. Digital subscriber lines "will absolutely make or break the future, and we think it will make the future." |
