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STREET WISE by Amey Stone January 3, 2000
Oracle as a Lesson in Buy-and-Hold Investing
Sure, it has been beaten down at times, but an 18,500% gain since 1986 is proof that patience can pay
Kevin R. Parke, chief equity officer of MFS Investment Management, loves to talk about Oracle (ORCL). Not only is the software maker a big winner for the $130 billion (in assets) fund family but it's also a prime example of how the buy-and-hold strategy endorsed by the Boston firm can work. In fact, investors who are tempted at the start of the new millennium to take profits in big winners or sell sound holdings that have stumbled would do well to consider Oracle's example.
Parke often uses a slide in presentations to investors to show that from October, 1986, through October, 1999, Oracle appreciated 18,466%. An investment of $10,000 13 years ago would have grown to nearly $2 million today. Over the same period, the S&P 500 has gained a relatively modest 695%.
Oracle's sharpest ascent has come in just the past two months, as it rocketed from $47 on Nov. 1 to a Dec. 31 close of 112 1/16, a record high. Catalysts included a positive earnings surprise for its fiscal 2000 second quarter, in which Oracle posted profits of 26 cents a share when Wall Street was expecting 22 cents. Analysts praised the company's "exploding" operating profit margin, which it boosted by using the same productivity-improving software systems it sells to other large companies (in essence, eating its own cooking). Analysts also cheered Oracle's growth in software licensing revenue and Net-related application software sales.
B-TO-B BOOST. Investors may be clamoring for shares in tiny new companies that seem poised to benefit from growth in business-to-business e-commerce. But "Oracle, in my opinion, is the real beneficiary" of expected growth in b-to-b Internet sales, says Art Russell, an analyst with Edward Jones. Another catalyst: On Dec. 20, the company announced a 2-for-1stock split that will take effect on Jan. 18. And investors are looking forward to renewed corporate spending on technology now that Y2K is past.
The bottom line is that investors have renewed faith in Oracle's status as a leading technology company with a key role in building the infrastructure for electronic commerce, namely, selling corporate customers a suite of e-commerce software they can use to reinvent themselves for the Internet Age. And CEO Larry Ellison told Wall Street recently that investors "ain't seen nothing yet."
Indeed, says Frank Holmes, CEO of fund firm U.S. Global Investors: Oracle has "revenues and earnings and, relative to other companies whose growth is predicated on the success of the Internet, is trading at a reasonable price." Holmes, who holds Oracle as one of his primary Net plays, credits Ellison for having the vision to position the company correctly for the Web. "He sees its significance," says Holmes. "That's what brilliant management is." Merrill Lynch said in a Dec. 15 report on Oracle that "its long-term positioning as an e-business platform should maintain its status as a long-term core holding for all technology investors."
VOLATILE HISTORY. Fans haven't always been that easy to find. As Parke has been saying lately in his yearend presentations, "there have been times where you might have been embarrassed to own this stock." Oracle shares fell from mid-1996 to late 1997 and suffered another punishing decline in the first half of 1998. Both times they recovered to spike higher on good news.
Why is Oracle so volatile? Partly because it has a pattern of doing most of its big deals in the last few weeks of a quarter, says Russell. That makes it hard for the company to guide Wall Street and leads to both negative and positive surprises in earnings. Also, notes Russell, it's harder for investors to understand Oracle than software companies like Microsoft, since most investors don't use Oracle products themselves.
By early 1999, investors were again judging Oracle a risky bet. Worried about stagnation in the market for enterprise resource planning (ERP) software and concerned that companies would cut back on capital spending in anticipation of Y2K, investors sold off the stock after Oracle reported disappointing fiscal third-quarter results. On Mar. 11, Oracle suffered a punishing 22% one-day decline. Although its profits exceeded analysts' estimates that quarter, its product sales growth, especially in database and applications software, was far slower than expected. Of the 28 analysts who cover Oracle, seven downgraded the stock on Mar. 12, according to First Call. By April, Oracle was selling in the mid-20s.
BUY ON WEAKNESS. That was the point at which the company's decision to Web-ize its entire product portfolio started paying off. It had just released a new version of its core database management software, Oracle 8i, that includes Internet support. In retrospect, it would have been a great time to buy, says Russell, who says he has been recommending the stock for the past year.
So how is it that on Dec. 22, Russell lowered his rating on Oracle from strong buy to buy? "We're just trying to back off a notch. This was purely a valuation call," he says noting that Oracle is now trading at a lofty 70 times his estimate for 2001 earnings. Russell says he's "very optimistic long-term," and he recommends that investors buy on weakness or dollar-cost average into the stock. If you already own Oracle, he adds, "stay on for the ride."
Many market watchers think high-flying tech stocks such as Oracle could stumble in early January as investors take profits. But given Oracle's long history of beating the S&P and its key position in e-commerce, selling the stock now could be the riskiest move of all.
Stone is an associate editor at Business Week Online
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