From the WSJ:
Heard on the Street
Some Bulls Make a Case
For Buying Tech Stocks
By SUZANNE MCGEE and ROBERT MCGOUGH
Staff Reporters of THE WALL STREET JOURNAL
Some tech-stock bulls, though bloodied, are unbowed.
After Friday's jolt -- which left the Nasdaq Composite Index down 35%
from its peak of early last month -- some investors insist on standing by their
lists of big, dynamic "got-to-own" stocks such as Cisco Systems, Sun
Microsystems and Intel.
That's what Robert Froelich, vice chairman and chief executive at Kemper
Funds in Chicago, is doing. In January, he said the worst mistake an investor
could make in the "new world order" would be to shun "all the right
companies with the right people with the right vision because the stock is too
high."
And today? He's more convinced than ever he's right. The Nasdaq slide, he
scoffs, is "the bear's brief day in the sun." In a month, he predicts, investors
will kick themselves for not snapping up their favorite stocks at a 20% to
50% discount. Says Mr. Froelich: "This is the greatest opportunity for
individual investors in a long time."
Perhaps. But there's no denying an important shift in investor psychology.
Though there's remarkably little change in bulls' core tech holdings -- Cisco,
Oracle, Sun and Intel dominate, along with Internet players America Online
and Yahoo! -- the rationale for owning them is in flux. No longer are they
prized for outsize stock performance; rather, money managers now portray
them almost as defensive plays.
Sure, these stocks could be winners in tomorrow's economy. More important
now, however, is that they've got operating histories, they're part of blue-chip
indexes and have held up relatively well, compared with the speculative
dot-com universe.
"A year ago, the world was different -- we were a year earlier into the life
cycle of this investment opportunity," says Henry Blodget, Internet analyst at
Merrill Lynch and one of the market's best-known bulls. "Back then, the tide
was coming in so fast that all you had to do was be a boat and you'd rise.
But now we've packed the harbor with thousands of boats and the tide isn't
coming in so fast anymore."
Mr. Blodget is one of a number of market strategists and investors who
predict that the rapidly growing bifurcation between technology's "haves"
and "have-nots" will become even wider.
After all, contends Bruce Steinberg, chief economist at Merrill, technology
stocks haven't suddenly become tulip bulbs. Fundamentals still look good: He
expects earnings for the sector to grow at 36% annually this year and
possibly next, three times his forecast for the rest of the Standard & Poor's
500-stock index.
Unlike tulip bulbs, he says, quality technology stocks, those with real and
growing earnings, "have real value." And one day, the bloodshed will stop. "I
can't hazard a guess as to when," Mr. Steinberg says. "But there are names
out there that people will want to grab."
Such as Cisco, the networking colossus, and EMC, according to Erik
Gustafson, who manages $3.5 billion for Stein Roe & Farnham, a Chicago
fund family. Both have been battered in the sell-off, but have held out better
than smaller companies. Mr. Gustafson believes that "these great companies
will go up in value again because their businesses are outstanding."
He and some other managers remained undaunted Friday. "The market's a
bloody mess, but we're still buyers," Mr. Gustafson says.
Also sticking to his guns is Thomas Galvin, investment strategist at
Donaldson, Lufkin & Jenrette Securities. "The argument against tech stocks
is one-dimensional," Mr. Galvin proclaimed six weeks ago, just before the
bloodbath began.
"I really think if anyone can take a 12-month outlook instead of a 12-minute
outlook, there's only 200 or 300 points of downside risk for the Nasdaq and
2000 on the upside," he says now. "Any time there's a 10-to-1 ratio of
reward to risk, you want to be in there buying with both hands."
Some things have changed, however. Until recently, he says, "technology
stocks were innocent until proven guilty, while Old Economy stocks were
guilty until proven innocent." Now, however, "technology has to win favor
the old-fashioned way, by exceeding expectations."
Indeed, the refrain among Wall Street's somewhat subdued and smaller
crowd of bulls is that it's time the technology stock universe adopted some of
those old-fashioned market virtues. Even Mr. Blodget, longtime fan of such
new era Internet stalwarts as Priceline.com, Webvan and Amazon.com,
agrees that in the current environment "your screen for quality cannot be too
fine."
These days, he says, direct Internet stocks are only for investors with a
speculative bent and a very strong stomach. The right approach to the
Internet and tech stocks for the majority of investors, he adds, is to seek out
an indirect play. These could range from United Parcel Service, a
much-used delivery service for Internet shoppers, financial companies that
make efficient use of the Web, or infrastructure companies like Cisco or
Oracle.
Those are also companies more likely to have profits, and to trade based on
conventional valuation measurements rather than more novel price-to-sales
ratios or the even more speculative basis of linking the stock price to the
number of "hits" on a Web site.
"As an investor, you need to have exposure to this sector," Mr. Blodget says.
"It's a super-important trend -- it's not a hallucination. The trick is to manage
the risk."
For now, at least, that risk looks nerve wracking. "The leaders go down with
the troops" in down markets like those of Friday, of October 1987, and of
late 1990, says Ed Keon, director of quantitative research at Prudential
Securities.
Still, he's betting that buying leadership stocks will remain a good strategy, in
technology just as it has been in other sectors. (Think of General Electric:
Dubbed pricey for years, it's a cherished institutional holding.)
Besides, the battle-scarred bulls note, fundamentals still look solid. "Business
is absolutely on fire for a lot of these emerging-growth companies," says
Dale Dutile, co-manager of the MFS Emerging Growth Fund. "But how
stock prices relate to those fundamentals does seem to be changing."
It's only a matter of time before investors sort out technology elite from the
also-rans, Mr. Dutile says. Companies like Cisco and Oracle, which have
recently amounted to as much as 20% of his $15 billion fund, have
fundamentals that justify outperformance, he argues. Other companies --
"the sexy, flashy ones with the right buzzwords" -- don't, he says. The trick:
Sorting out the wheat from the chaff.
"I would be buying stocks like Amazon, Lycos, DoubleClick," says Merrill's
Mr. Blodget. "But believe me, I have no idea what they're going to be doing
Monday morning."
Ian |
