Tom Kurlak, remember him? He's buying Intel right now, sees the tech wreck coming to an end by 2002 but time to start buying Intel, and Ericsson now.
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The Keys to Success in a Post-Tech World
By Thomas Kurlak
Special to TheStreet.com
4/6/01 8:15 AM ET
In case you don't know me, I recently retired after 20 years on the sell side as a semiconductor analyst for Merrill Lynch, and a brief stint as a technology hedge fund manager for Tiger Management. You may remember me for some of my "controversial" calls on Intel (INTC:Nasdaq - news - boards) over the years. After three months of observing the investment scene from afar, I was asked by TheStreet.com to share some of my thoughts on investing in today's turbulent markets.
When I left Tiger in December, my parting recommendation was that 2001 would be the year of anti-tech. That's a not-too-surprising suggestion given how tech stocks exited in 2000, but certainly the extent of the meltdown has been a surprise to many. And for many young technology analysts, the experience will be the crucible that forges more perceptive analysis, more questioning of management "guidance" and more humility before issuing a new buy recommendation with their name on it.
The cult that developed around tech stock investing between 1995 and 2000 was without precedent. We have seen other periods of blind faith in the growth of other groups of stocks -- such as oil in the early 1980s, or the Nifty Fifty in the early 1970s -- but this period was off the chart.
The really religious of this cult went for the dot-coms with an evangelical belief in future profits that had as its foundation the successes of known megastars such as Intel, Microsoft (MSFT:Nasdaq - news - boards) and Cisco (CSCO:Nasdaq - news - boards). Tech investors, led by the preaching of Wall Street gurus, believed (or wanted to believe) that they had found a better way, a way to investment profits where all you had to do was place faith in an idea. The market would do all the work for you; it would value the future now.
It was not unlike the oil boom of the early 1980s: When oil and gas stocks reached their peaks, they represented nearly the same 40% of the S&P 500 that tech reached last year. Basic valuation concepts were abandoned, replaced by measures of reserves in the ground and barrels per share, much like page views came to measure the dot-coms.
But when the dot-com profits failed to materialize, the followers fled. And a lot of that money moved into the tech megastars, where investors thought they could see "real" profits and a record of predictability that allowed them to rest easier -- and hopefully recoup their Internet losses. Not coincidentally, five months after the dot-com peak, Intel, with the help of recycled tech money, hit its all-time high of $75, in August 2000.
But the market hadn't seen what the wrath of jilted tech investors could do until the megastars disappointed. Blind faith leads to blind fury when the basic tenets of a belief are dashed. For the past seven months, the market has witnessed the destruction of an investment cult that allowed itself to believe that technology was a fountain of wealth, where, once you abandoned old beliefs about valuation, you could realize unlimited fortune.
A Return to Sense
What will replace the failed new religion? As quickly as one cult dies, another rises, usually based on the opposite of what was believed. If anti-tech means antihype, predictability, it means an understandable business and it means low PEs (or at least until everyone gets in).
We've seen the potential leaders of the new religion on the list of new highs these past seven months. These candidates include energy, life insurance, engineering and construction, aerospace and defense, drugs, regional banks, railroads, machinery and other salt-of-the-earth industries upon which much of our society depends for daily necessities and functions. Earnings misses in these industries are more acceptable; these stocks don't drop 50% in a day. Here, true believers can rest assured that when they wake up tomorrow their companies will still be there, just like they've always been.
So looking to 2002, what can we expect from this new religion? Can we be sure it will be different from the tech cult? Its valuation methods begin with embracing again old concepts such as price-to-earnings ratios and return on equity. But under the surface lurks that same cultlike motivation, whereby its followers seek sure-fire success by believing in a concept.
While the new religion features new names and concepts, at heart, it's the same quest for the sure thing -- so I'm being careful to contain my enthusiasm for the new market leaders while enjoying the ride. There is life after tech, and it is fun "discovering" new names where managements are not promotional, balance sheets and income statements are reliable measures of results and products are easily understood. And the stocks are underowned, so earnings misses are less traumatic events.
Time for a Toe in the Water?
But what about tech's future? What happens now? Other than being the year of anti-tech, 2001 may also be the year when good tech investments can be made for the long term. The religious fervor of 1999/2000 may not come back again, but real profits earned by real companies producing real products and services will eventually make for rising share prices. It just won't be accompanied by the fanfare of recent years -- at least not right away.
As for me, I'm putting some money back into selected tech areas, starting with personal computers, the first sector to disappoint last year. More specifically, I am buying Intel (INTC:Nasdaq - news - boards). I'm also starting back into wireless, the second tech sector to disappoint last year, and I've begun with infrastructure leader Ericsson (ERICY:Nasdaq ADR - news - boards).
Intel and Ericsson are two first-class companies with worldwide recognition, long histories of innovation, solid market positions and very depressed stocks. Both companies are working through management transitions -- Ericsson more recently than Intel -- and both have seen abrupt slowdowns in their end markets caused by inventory build-up, Y2K and the short-term perception that more power and functionality is not needed. But unlike telecom equipment, for example, PCs and cell phones are bought by consumers as well as businesses and, while these are mature products, they are necessities that need replacing from time to time.
The pre-Y2K PC buying spree in 1999 should lead to a replacement cycle in 2002, and Intel still dominates the PC processor market. Intel management has recently reaffirmed its focus on chips by indicating its intention to exit unrelated business forays, and by sticking to an aggressive new capacity build program. This ensures leadership products and low costs. Also, recent signs point to an end to the decline in PC demand. Motherboard orders have actually picked up in Taiwan, and DRAM prices have stabilized; both are historically good indicators of resumed PC demand.
The cell-phone buying frenzy in 1999 and early 2000 was the wireless equivalent of everyone connecting to the Web. And it got saturated. But cell phones become obsolete quickly, with new services that require a new phone continually being offered. Behind these phones is the switching equipment and software infrastructure to make the calls, a market that Ericsson still dominates. And Ericsson looks likely to maintain that dominance in future phone generations, based on orders received so far.
So while most of my money is on the "new" leaders of the Old Economy, I think the tech wreck is coming to an end, and the PC and wireless sectors should lead a recovery in 2002. |
