redherring.com
Ten tech stocks for the next
century
The company picks are market leaders with
competitive advantages.
By Peter D. Henig
From the January 2000 issue
In 100 years, when we're all food for worms, the
word portal once again refers to a doorway, and
desktop PCs are fossils embedded in the dirt of
Silicon Valley, which stocks will your
grandchildren wish you had invested in today?
We think that technology stocks will not only
lead investors into the next century, they will
dominate all other investment opportunities.
They're the stocks for 2000 and beyond.
Don't get us wrong. We're not so presumptuous
as to assume that current companies -- even
the Microsofts and Ciscos of the world -- will
still be here in 100 years. Trying to pick even a
single company that will last a century is a fool's
errand. We do, however, believe that it is quite
possible to identify companies that are best
positioned today, companies that, if bought,
sold, or merely merged out of existence, will
provide investors with extraordinary returns over
the life of an investment.
Below you will find Red Herring's top ten tech
stocks for the long-term. Although they cut
across a broad range of technology sectors,
from wireless communications to online financial
services and media, they do, nonetheless, share
a very important characteristic: they all have
dominant market positions that have been
maintained-and enhanced-through flexible
business models and swift management
decision-making. Put the stocks together, and
you've got a model portfolio to start the next
century.
LET THE GOOD TIMES ROLLOVER
Naysayers might claim that technology has had
its time in the sun. The sector is up 660 percent
since January 1991, they say, how much longer
can the good times last? Indeed, history does
seem to bestow its favors on different sectors
over time. For example, from roughly 1920 to
1980, cheap oil powered a mass
production/mass consumption economy, leading
to the rise of this century's consumer darlings
like Ford (NYSE: F), General Electric (NYSE: GE),
and Coca Cola (NYSE: KO). When that 60-year
economic cycle petered out, electronics (led by
the semiconductor revolution) suddenly replaced
cheap oil as the market driver for a new
high-powered economy.
The unbelievable increases in computing power
described by Moore's Law -- which states that
microchip capacity doubles about every 18
months-make it clear that technology, unlike
cheap oil, will thrive beyond a mere 60-year
stint in the limelight. Indeed, according to
Michael Murphy, editor of the California
Technology Stock Letter, the technology
industry will ultimately account for 25 to 30
percent of the gross domestic product. That's
because the sector's products-software,
networking products, and wireless
communications to name a few-have each
become a crucial part of the way the world
conducts business.
Ever faster and ever cheaper technologies that
the electronic revolution created have become
the de facto choice for managers seeking
productivity improvements and growth drivers.
That demand fuels the industry's own
profitability, which, in turn, results in even more
powerful technologies that high-tech suppliers
can sell to an almost unlimited number of end
markets. And the cycle repeats itself. "The
beauty of technology is that it's a virtuous
loop," says Charles Crane, the chief market
strategist for Key Asset Management. "True, it
needs the benefit of economic growth to fuel
technological development, but once it's built a
better mousetrap, the market creates its own
demand."
Each of our picks is, in some way, taking
advantage of the huge communications and
Internet boom that, in and of itself, is probably
only in the fifth year of a 20-plus year buildout.
All are also market leaders with profound
competitive advantages. And they still behave
young enough and react fast enough to maintain
those advantages over time. As Steve
Milunovich, director of technology research for
Merrill Lynch (NYSE: MER) puts it, "It's hard to
forecast where a product will be in ten years,
but what may be sustainable is the ability of a
company to come up with ever better ways of
sustaining its own competitive advantages." In
other words, each of our ten companies has
been around the block enough times to show
that it can react to various changes in the
competitive landscape.
That necessarily precluded us from including
many of the hot young companies of the
Internet boom. It's not that we wouldn't love to
offer investors a portfolio of undiscovered
winners in technology -- and indeed we do --
but we decided not to take risks with smaller
companies that might lack the experience,
connections, or financial heft to survive the
next seismic technology shift (or the next or the
next). The technology sector, unlike many
others, is one in which the strong tend to get
stronger and the large get larger. The ability, for
example, to spend millions upon millions on R&D;
more often than not merely extends a
successful company's lead over its competitors.
Other issues, such as brand recognition, control
of sales channels, the ability to acquire upstart
competitors, and global sales opportunities also
reinforce entrenched companies' positions. As a
result, only two of our top ten companies have
annual revenues under $1 billion, and all have
market caps of $10 billion or more. |
