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Technology Stocks : Jabil Circuit (JBL) -- Ignore unavailable to you. Want to Upgrade?

To: rich evans who wrote (5334)	10/8/1999 3:49:00 PM
From: patroller	Read Replies (1) \| Respond to of 6317

Paul check this. Heard from the buy side Contract-manufacturing companies are poised for Internet-like growth. By Paul Meeks Red Herring magazine From the September 1999 issue For the first half of this year, I was only cautiously optimistic about technology stocks. The end of winter brought to light serious -- and probably permanent -- problems in the personal computer industry, plaguing central actors like Compaq Computer (NYSE: CPQ), Hewlett-Packard (NYSE: HWP), Dell Computer (Nasdaq: DELL), Gateway (NYSE: GTW), and IBM (NYSE: IBM) as well as their supporting cast. Late spring saw a shrinking, however temporary, of the Internet bubble. And we began the summer under threat of higher interest rates, which doesn't bode well for technology securities. Heard from the buy side Downtempo for digital downloads E-Stamp IPO to go postal Despite the uncertain future -- whether technology customers will defer purchases in the second half of 1999 for fear of the year 2000 problem, and whether the still-weak economic conditions in Europe, Japan, and the rest of Asia will improve -- I am becoming increasingly confident that technology stocks have reached their trough for 1999. Overseas, we are starting to see some subtle signs of economic stability. Back in 1995, the last time that the economies of Europe, Japan, and the rest of Asia were all humming, 30 to 40 percent of all technology vendors' products were being exported to those regions. If economies abroad continue to improve, Wall Street will be forced to increase earnings estimates significantly for many tech companies -- thus pushing tech stocks higher. Chip makers outsource manufacturing. Net stocks wince from interest-rate pinch. In the United States, the Fed's intent to tighten interest rates has already led to significant compression of valuations assigned to technology high-flyers. Investors have also discounted the fact that the glory days of the PC industry are over for those companies that don't diversify quickly from simply selling boxes. The tech industry's leadership has begun to shift from companies that support the PC industry to those companies that support communications industries like data networking, telecommunications, and the Internet. So where best to profit as we rebound from this trough? Certainly the Internet, like boxer Evander Holyfield, is the "Real Deal." This industry will offer long-term returns among the best in the technology sector -- just focus on Internet leaders like America Online America Online (NYSE: AOL), Yahoo (Nasdaq: YHOO), eBay (Nasdaq: EBAY), and Exodus Communications (Nasdaq: EXDS); wait for stock price dips of at least 30 percent; set a buy limit; and sit patiently until your favorite Internet stock hits it. It's like the weather in New England -- if you don't like it, just wait a few minutes. Although I'm enthusiastic about the long-term prospects of the Internet leaders -- I'm most bullish on the contract manufacturing industry. There is a trend toward outsourcing manufacturing operations as more technology leaders -- from networking equipment vendors like Cisco Systems (Nasdaq: CSCO), to workstation manufacturers like Sun Microsystems (Nasdaq: SUNW), to communications equipment developers like Nokia (NYSE: NOK) -- move from the vertical model, in which they both design and manufacture electronics, to the virtual model, in which they unload the production to companies like Solectron (NYSE: SLR), Jabil Circuit (NYSE: JBL), Flextronics (Nasdaq: FLEX), Sanmina (Nasdaq: SANM), SCI Systems (NYSE: SCI), and Celestica (NYSE: CLS). Consider this: Technology Forecasters, a contract-manufacturing market research firm, estimates that the cost of manufacturing the goods sold by worldwide electronics makers is about $600 billion. With an estimated growth rate of about 8 percent per year, the contract manufacturing opportunity will approach $1.3 trillion by 2008. Currently, only 14 percent of this enormous pie is outsourced; by 2008, I expect a 50 percent shift to outsourcers. And, as is typically the case in technology, the strong will get stronger. Investing in the contract manufacturers provides all the enticements of Net stocks, but at much more reasonable valuations. And, yes, these companies actually make money. Lots of it. Paul Meeks is a senior portfolio manager at Merrill Lynch (NYSE: MER), where he manages its Technology Fund and its new Global Technology Fund. Send comments to letters@redherring.com