From Barrons re: PMC Sierra & others
The Phoenix Sextet?
Six tech stocks that three pros think might rise from the ashes
By Barry Henderson
Imagine waking up early one morning to find that some prankster has reversed all the one-way street signs on Fifth Avenue and now traffic is going north, not south. You're sure this shouldn't be happening and know that everyone else is going the wrong way, but when you actually get out on the road in your car, you can't bring yourself to drive against traffic. In fact, your survival seems to depend on your ability to go with the flow.
That's the kind of feeling managers of technology funds had last week. Most have watched huge inflows into their funds slip away in the blink of an eye. And yet, many of these managers are afraid to get out there and start buying. The response we got when we checked in with T. Rowe Price on Friday was typical. A company spokesman said that its tech specialist, Charles Morris, felt that although there were good deals to be had among technology stocks, he was convinced that they would be even better bargains in a few more days. We also called Janus and RS Investment Management but they chose not to offer up any picks, either.
We did manage to find bolder souls, some who were busy buying technology stocks 50% or more below their highs. For example, Kevin Landis, who runs the well-regarded Firsthand Technology Value and Firsthand Technology Leaders funds, likes stocks such as Digital Microwave, Corning and PMC Sierra. The first of this group makes the microwave radio networks that carry cell-phone calls. "Everyone runs around trying to play the growth in cell-phone usage so they buy things like handset makers -- Nokia and Ericsson -- or the service providers. But they never seem to think about the network that carries all those calls," he told us.
Digital Microwave, which closed just under $25 on Friday, should come in with better-than-expected earnings next week, according to Landis. Landis' other two picks, PMC-Sierra and Corning, will continue to benefit from increased spending on optical networking, in his view. Optical networks carry data at rapid speeds.
When technology stocks rebound, Landis says, "people are going to buy PMC and Corning because you're not going to lose your job if you recommend them."
PMC-Sierra reported better-than-expected earnings Thursday, 17 cents a share from operations, compared with the consensus estimate of 16 cents. Landis thinks that trend will continue. The company's customers include Cisco Systems, Lucent Technologies, Nortel Networks, 3Com and Alcatel.
Landis is the first to admit that tech investors don't seem to care about earnings right now. PMC dived from its $153.75 high to $125.66 right before its strong earnings announcement on Thursday, and then on Friday the stock dropped to $118. Landis remains unruffled. "I think people that bought PMC right before the earnings announcement are going to look back on this as a good trade," he said. He sees the stock getting back to $200 per share before too long. Its 52-week high was just over $250.
Landis calls Corning a "fiber franchise for the long run." A few years ago, he wasn't too excited about Corning. At the time, it specialized in fiberoptic cable itself, which he considered a commodity business. In fact, he got involved only after one of his stocks, Oak Industries, was bought out by Corning. Oak, a high-growth optronics business, was similar to JDS Uniphase. Landis took Corning stock in the buyout and has hung on ever since. He got into the stock at $200 per share a few months ago with a price target of $300. He's still convinced it can get to his target, despite the fact that it's plunged about 30% in value since he bought it, to $140 per share.
Dave Smith, a co-manager at Loomis Sayles' Global Technology, Small Cap Growth and Aggressive Growth funds, is also nibbling away at a few optics companies. Unlike Landis, he's focused on a smaller outfit called SDL Inc., which makes "active" optical networking components. "Demand for these components continues to be strong, not just in the U.S. but all the world," says Smith. SDL reports earnings next week, and Smith thinks it will beat expectations. For fiscal 2000, which ends in December, analysts expect the company to earn 79 cents; in fiscal 2001 the consensus estimate is $1.13. This rapid earnings growth, combined with sharp revenue gains, will eventually propel the stock upward again, he predicts. Late Friday SDL was changing hands for $143 per share, down sharply from its 52-week high of $244.75.
Smith also likes Powerwave, a company that makes power amplifiers for cellular-phone base stations. Revenue growth has been explosive and is likely to continue so because the company just received a five-year exclusive contract from Motorola. Before this deal, Powerwave was already showing impressive earnings gains. In fact, earnings grew an astounding 85% in the latest quarter compared with the same period last year. Even better: Gross margins, now in the low 30% range, are on the upswing. The stock is trading for $114, and Smith expects it to move up before long.
Another company he likes at these prices is Advent Software, which makes specialized software for the investment management business. Loomis Sayles, Oppenheimer Capital and Pimco have all apparently signed on as customers. The software package is geared toward back-office administration, not trading. The company is also working on programs to allow money-management clients to access their information with an Internet browser. Analysts says this company is expecting revenues of $140 million this year and $185 million next year. That revenue growth is especially potent for this company because it has a gross margin of 81.7%. Right now the stock is changing hands at $40, down from its 52-week high of $65.75. Smith thinks that once investors start to give the company credit for its growth rate, the shares will be headed higher again.
Another software favorite is Art Technology Group. Jay Tracey, the helmsman on OppenheimerFunds Enterprise Growth Fund, says this company is an early version of Broadvision or Vignette. Like the larger, better-known firms in this area, Art Technology makes software that allows customers to join forces to get better pricing on the World Wide Web. Although the company isn't profitable and is expected to lose 20 cents a share in 2000, Tracey thinks it will cross over into the black before the second quarter of next year. This year the company is expected to bring in about $77 million in revenues, and that could double next year.
No doubt a lot of investors, and a lot of money managers as well, will remain too nervous to buy in today's market. Tracey, Smith and Landis are not among them. They see value where others see only trouble.
Down But Maybe Not Out
All these stocks have been battered by the market's recent convulsions. But some investment pros think the selling has gone too far and they believe these shares could revive.
52-Week
Company Symbol Stock Price High Low
Advent Software ADVS 40.20 65.75 17.51
Art Technology Group ARTG 39.98 106.50 5.13
Corning GLW 144.00 226.44 47.69
Digital Microwave DMIC 24.88 48.50 8.75
PMC Sierra PMCS 118.44 255.50 17.73
Powerwave PWAV 114.06 205.00 21.63 |
