STOLEN STUFF--An interesting article from Saturdays Globe and Mail ( Canada's National Newspaper) Section N page 1.
Entitled : Tech Fire Sale
Tech Fire Sale?
The tech sector has gone from hero to zero in a frighteningly short period of time. With stocks well off their highs, is it time to dip back in? As SHIRLEY WON discovers, many market watchers say yes, although risks abound
SHIRLEY WON
Saturday, October 21, 2000
The day before the technology-laden Nasdaq composite index plunged last week to its lowest close this year, portfolio manager Duncan Stewart called his mom in Vancouver, and
told her it was time to buy his technology fund.
"She had some cash, and she asked when should she buy more," says Mr. Stewart, a partner at Toronto-based Tera Capital Corp.
"I am not telling people out in the world at large though that it is necessarily the right thing to do," he added. "Caveat emptor -- talk to your financial adviser, and it all depends on your risk tolerance."
But Mr. Stewart, whose Navigator Canadian Technology Fund logged a 122.7-per-cent return over the year ended Sept. 30, has been busy buying beaten-down tech stocks with the
cash he built up in anticipation of the current downturn.
Despite wild swings in tech stocks this week, he is still boldly predicting Nasdaq will hit a record 6,000 by March. "I suspect that -- if anything -- that is likely to be conservative," he adds.
Mr. Stewart is among market watchers who are bullish on the tech sector -- especially over the next six months when their stocks typically rally. But others still remain cautious, warning that the tech sector -- while a secular growth story -- is still not immune to a slowdown in
global economic growth.
Last week, earnings jitters combined with turmoil in the Middle East sent the Nasdaq composite index tanking to its low of 3,074.68 points for the year -- nearly a 40-per-cent
drop from last March's record high of 5,048.62.
Nasdaq has since experienced a a bit of a bounce as investors nervously waited for, and reacted to this week's third-quarter earnings reports by tech bellwethers like Intel, IBM,Microsoft and Nokia.
Mr. Stewart is not worried about slower earnings by some companies for the third quarter, saying that period typically is one of the weakest quarters because of the traditional summer slowdown in European sales. "That's because everyone in Europe goes on holiday for two
months," he said.
But good news will soon start overwhelming the bad news, and stocks should rebound, he said. "It is my anticipation that the fourth quarter will, in fact, show the highest level of high-tech quarterly earnings in history."
Mr. Stewart said he is even more confident of his prediction now that Nokia -- the world's largest cell phone maker -- beat third-quarter earnings expectations, and said it expects a record profit for the fourth quarter.
When Nasdaq rallied to a record during the first three months of this year, he said the U.S. Federal Reserve Board was raising rates and there were serious concerns about inflation. But there is now a possibility the central bank may cut rates by that same time frame next year, he added.
"All other things being equal -- if you have stronger earnings and falling rates instead of rising
rates -- one would expect the Nasdaq composite to be trading at higher valuation than it did in March of 2000," he said.
Other fund managers are also bullish for the next six months but their caveat is that the strongest returns will come from a new breed of companies as opposed to "old world
technology" companies like Intel, Microsoft and Motorola.
Toni Shimura, a fund manager at MFS Institutional Advisors Inc. of Boston, said the period from mid-October to March is seasonally the best time for tech-stock returns but suggests it will be "tough" for Nasdaq to hit 6,000 by March.
"Six months ago, many things were rosy in technology but I think what we have seen . . . is that the series of six interest rate increases that the Fed has put into place has started to slow the world," said Ms. Shimura, who manages the Spectrum American Growth Fund,which is half invested in techs.
She has been selling what she describes as the "old world technology stocks" -- like major personal computer, computer chip and cellphone makers -- because they are economically sensitive, and are seeing growth rates slow. She no longer owns big names like Intel, Dell, Motorola, Lucent, Xilinx, Altera, Nokia, Ericsson, Micron Technology and Applied Materials.
But Ms. Shimura is very positive on other high-growth areas like optical networking. "With the demand for high speed data and all things happening in business-to-business
e-commerce, there is a demand for the pikes or conduits that will allow all of this data to flow very rapidly between all the users."
She owns stocks like Ciena, a leader in optical networking equipment; Corning, a maker of optical fibre, and Nortel, the telecommunications equipment maker with a large optical
component business. She also favours emerging networking firms like Juniper Networks and Extreme Networks; software companies enabling e-commerce like i2 Technologies and
Ariba, and data-storage software firms like Veritas Software, Brocade Communications Systems and Emulex.
Ian Ainsworth, a portfolio manager at Toronto-based Altamira Investment Services Inc., said he too sees "good potential" for a rally going into the new year but doesn't believe Nasdaq is a good proxy for tech stocks.
Mr. Ainsworth, who manages the Altamira Science & Technology Fund,said Nasdaq is overweighted in maturing companies that "don't have as much growth potential," compared with some companies that are less dominant in Nasdaq.
"You can own Dell, Microsoft and the big commodity semi-conductors and you'd not be performing this year," he said. "If you owned the newer technologies -- the companies that will make up the future Nasdaq -- then you are doing better."
In his fund, Mr. Ainsworth said he is underweight the weaker tech sectors like PCs, dot-coms, cellphones and computer chip makers. Instead, he likes companies like Juniper, Ciena, Sycamore Networks, Celestica, Extreme Networks, Applied Micro Circuits, Nortel and BEA Systems.
Stephen Kahn, a Toronto-based portfolio manager with Talvest Fund Management Inc., said he too believes there will be a tech rally in the next six months and "some areas of technology are going to do a lot better than others."
Mr. Kahn, who manages the Talvest Global Science & Technology Fund, said he believes optical equipment makers -- like Nortel, Ciena and Sycamore -- will do well as will handheld computers makers like Handspring and Palm.
"I am bullish on the tech sector," he said. "I think there are a lot of good things happening -- especially at these prices. A lot of the risk has been priced into the stocks whereas a month and half ago, they were priced for perfection."
Richard Bernstein, chief quantitative strategist at New York-based Merrill Lynch & Co., has, however, been bearish on the technology sector for a year and a half, and is still "very cautious" on Nasdaq.
"Technology companies are inherently, tremendously cyclical," Mr. Bernstein argued. "As the global economy is slowing, cyclical stocks are seeing their earnings growth slow and that's what's happening in the technology sector. But they are priced as very stable, very fast-growing companies."
He said a prediction of Nasdaq reaching 6,000 is "optimistic" but conceded "there might be some kind of short-term bounce." But his outlook for Nasdaq for the next 12 months is a slightly negative return.
Mr. Bernstein said the technology sector is expensive relative to other sectors and dismisses prospects in the new breed of tech firms.
"There are these rotating bubbles in the tech sector -- it may be optics, infrastructure or B-to-B. I personally don't think it's the way to invest. It's safer to go into other areas as opposed to speculating in technology."
William Sterling, a New York-based manager with C.I. Fund Management Inc., is also skeptical about Nasdaq reaching 6,000 by next spring. "The next two quarters are going to
be the most challenging in terms of profits because of the slowdown that is unfolding in the global economy," he said.
Mr. Sterling's "somewhat cautious" stance is reflected in the C.I. Global Fund -- a global equity fund whose technology weighting has been pared down to about 15 per cent from about 46 per cent at the end of 1999.
The manager's cautious outlook is based on other indicators, including his belief the Fed is not going to lower rates soon.
"An aggressive Fed easing -- if that were on the horizon -- would help to support the bullish case for the Nasdaq," Mr. Sterling said.
"But with the unemployment rate in the U.S. at 3.9 per cent; with oil prices where they are, and with inflation well above 3 per cent, those are not the conditions that make the Fed anxious to cut rates anytime soon."
Analysts pick their favourite funds. Hang onto your seat belts.
When investing in technology funds, there is potential for high-flying returns. But these days, the only certainty appears to be volatility.
Technology funds have posted some eye-popping gains for the year ended Sept. 30. But most of that performance stems from the frenzy that sent tech stocks rising sharply in
November and December.
Performance has fallen off since the tech-heavy Nasdaq Stock Market began heading south last spring. "Next January, people are going to be pretty shocked by their one-year performance numbers," says Scott Barlow, an analyst at Toronto-based Merrill Lynch Canada Inc.
With Nasdaq hitting its year-to-date low last week and the bullish stance of some market observers -- albeit with caveats -- you may be considering investing in the sector.
We asked analysts to pick two tech funds for aggressive investors, and two diversified stock funds -- that typically have heavy tech weightings -- as a chicken's way to get exposure to this sector.
Merrill's Mr. Barlow likes AIM Global Technology because of its "terrific management," and strong research capabilities at Amvescap PLC.
He is also a fan of Trimark Discovery, a small-cap fund that invests mostly in technology stocks but often has 10 to 25 per cent in biotechnology.
Among diversified funds, Mr. Barlow suggests C.I. Global, which will overweight technology when its managers feels it's the place to be.
The fund had close to 46 per cent in technology at the end of 1999 but that weighting is now down to around 15 per cent. He also likes BPI Global Equity because its managers'
strength has been overweighting in sectors that will outperform, and more recently technology has been one of them.
Peter Loach, an analyst at Toronto-based BMO Nesbitt Burns Inc., also likes AIM Global Technology because of its "talented manager" who is backed by a strong team. He also recommends C.I. Global Telecommunications Sector, saying its manager Stephen Waite is very "in tune" with the sector.
Among diversified funds, he favours Universal European Opportunities, which tends to overweight technology and which would provide further diversification for Canadian investors who tend to be underweight Europe. He also likes BPI Global Equity, saying its managers are "nimble" stock pickers.
Stephen Kangas, an analyst at Toronto-based Fundlibrary.com, likes Altamira Science & Technology because of "continued outperformance," and because its managers have been "fortunate and smart" at identifying the next waves in technology.
He also likes AIM Global Technology because of its performance record, noting it is slightly more diversified than the Altamira fund.
Among diversified funds, Mr. Kangas likes Global Strategy Rothschild World Companies, which includes major tech names like Nokia, Cisco and Vodafone. He recommends Universal Future, a Canadian equity fund whose mandate is to be half invested in technology. The balance is currently in resources and cash.
James Gauthier, an analyst at Toronto-based Fundmonitor.com Corp., suggests BMO Global Science & Technology as a conservative, pure tech play. He also likes Talvest
Global Science & Technology because of its performance and the fact it's also the largest personal holding of its manager Stephen Kahn. This suggests "the manager is going to be as prudent as he can be," Mr. Gauthier said.
Among diversified funds, Mr. Gauthier recommends Universal Future because technology investing is part of its mandate and because this Canadian equity fund also has 25 per cent in foreign stocks. He also likes Spectrum American Growth. This U.S. equity fund is half invested in technology stocks, and that has been a strong contributor to its stellar performance, he said.
Shirley Won |
