Barron's provides a Good Interview with a Veteran High Tech Investor...
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Barron's Online
JULY 2, 2001
Steady As You Go
Veteran tech manager sees a slow recovery, but does find opportunities
An Interview With Paul Wick ~ At age 38, he's growing a bit long in the tooth -- for a tech-stock picker that is. But then again, Wick is one of the most experienced portfolio managers of a technology mutual fund in the country. He's been running the Seligman Communications & Information fund for more than 11 years now, and doing yeoman's work for much of that time. During the 1990s, his 10-year performance record was the best of any mutual- fund manager -- tech or otherwise -- clocking in with an annualized return of 29.9% for the decade.
But Wick lagged behind his competitors during a stretch of the post-Netscape era. Since he is somewhat fond of such quaint things as profits, revenues and cash, he passed on heaping helpings at the dot.com smorgasbord. And while many of his peers are still suffering from severe indigestion, Wick has experienced a mini-run. Year to date, his fund has scratched out an 8.4% return, which is better than nearly everyone else in his league.
We caught up with Wick in his new downtown Palo Alto digs. For his views on the state of technology stocks, read on.
-- Mark Veverka
Q: Barron's: What's the prognosis for the rest of the year?
Wick: Right now, it's a little challenging. Fundamentals are dreadful. And in some areas, like the networking industry and its food chain, they're getting worse. The optical side in particular does look like it will get worse in the third quarter. The outlook is so bad that even short selling may have run its course. A lot of the best opportunities are gone, such as in the Internet and networking. A lot of these are way off of their highs, and they don't look like they will go much lower.
Q: If shorts are fewer and farther between, does that bode well for longs?
A: Not necessarily. I don't think that anyone who is paying attention can come up with a V-shaped recovery. It is going to be a very slow gradual recovery from this technology funk. The PC market is mature. It's more like the refrigerator business. And then you look at the wireless market. We are at a pause in wireless-handset demand because there are no new features on the new phones that really will entice people to upgrade. Plus, 2.5G and 3G are quite a ways off. Those are two end markets -- PCs and handsets -- that are dead in the water, or look stagnant.
Q: Any more rosy news?
A: Then, you look at the networking and telecom segment. And rather than being in neutral, they seem to be in reverse still. And you've got this huge glut of long-haul capacity in the U.S. and Western Europe, and that is going to take a long time to bleed off. And with the Internet, there are still plenty of companies -- who knows how many? -- that are going under.
Wick: "I never understood the hoopla surrounding B2B marketplaces all that well. So we missed it on the way up, and we missed it on the way down."
Q: Should we just pack it in and go fishing for the summer?
A: No. On the upside, there are the videogame and automotive markets. There is a real opportunity for more silicon content to go into cars. And the satellite business is still okay. But those end markets are small relative to the ones that are really stumbling. One area that will probably pick up somewhat is corporate IT spending with the Federal Reserve-induced drop in interest rates. I don't think that it is an unreasonable proposition that the U.S. and world economies will improve as interest rates come down. That should have a salutary affect on corporate capital spending for nuts-and-bolts things, like mainframes, data storage and new software applications -- things like Windows 2000 upgrades. So things related to the enterprise will eventually come back.
Q: What about eBusiness software, or is anything "e" just so 'Nineties?
A: Boy, you know, I am the last guy you should speak to about that. I never understood the hoopla surrounding B2B marketplaces all that well. It saved us a lot of pain. The whole Ariba, Purchase Pro, VerticalNet collective insanity didn't strike a chord with us. So we missed it on the way up, and we missed it on the way down. It's always interesting to pull out the files on some of these companies and look at the prices where people initiated coverage with a Buy recommendation on them and the premise behind these recommendations. It was a hoot!
Q: So if we were "Being Paul Wick," what exactly would we see going on in your head during the zenith of the Internet hysteria?
A: I was staggered at what was going on. And certainly, we had a lot of antipathy toward the Internet group. We certainly didn't have a lot invested in public Internet stocks. It was the kind of thing that all of us expected to end badly, but it went on for so long that it started to make everyone feel that there was a permanent change in the way things were done.
Q: So now that the market has returned to Earth's atmosphere, what do you like?
A: There are certain companies we like a lot right now, because their businesses still have a reasonable degree of predictability and their valuations make sense.
Q: Do tell.
A: Lexmark looks good to us. We think people obsess too much about possible price competition from Hewlett-Packard. But these guys have been slugging it out with H-P for a long time. More than 90% of its profits come from the consumables business: inkjet cartridges.
Q: It is a razor-blade business model?
A: Exactly. What's more, the business throws off a lot of cash. The management team is astute. It buys back stock periodically, and it is a very good business. And Lexmark has gained marketshare partly because Hewlett-Packard's competition on the PC side has gotten tired of also selling H-P printers. So Compaq and Dell in particular increasingly are bundling computers with Lexmark printers instead of H-P printers. So, to some degree, H-P's strong position in the PC market acts as a brake on its ability to increase its market share beyond a certain level in printers because their PC competitors have a pretty obvious incentive not to do business with them. So if you are Dell or Gateway, why would you want to send business to H-P? The odds are you would rather do business with Canon, Epson or Lexmark. Those are the facts of life.
Q: Last quarter, you were smitten with Novellus. Do you still own it?
A: We do, although we actually sold quite a bit of it. A lot of the semiconductor capital equipment stocks have had pretty significant moves upward from their lows.
Q: Hasn't any declaration of a rebound in that sector proven premature?
A: Yes, exactly. The semiconductor capital equipment companies are at the bottom of the food chain. And indicators at the end markets have not become any better. Recovery in the end markets is going to take longer to happen than originally thought, which has to mean that the recovery in the semiconductor industry, and in capital spending in the semiconductor industry, is longer out than had been hoped even a few months ago. Foundries aren't going to be spending nearly as aggressively as they need to in order to levitate the semiconductor equipment business.
Q: Hence, your loss of love for Novellus?
A: We still love Novellus. We think it is a great company, with a visionary management team that is very pro-shareholder. We think that is the best-positioned semiconductor capital equipment company in the world. But a stock price in the high 50s doesn't leave a lot of room for price appreciation for our shareholders. So, we've taken Novellus down from a 5% position in our fund to a 2% position.
Q: What are your other favorites?
A: We are pretty bullish on Synopsys and Cadence Design Systems. The electronic design automation business looks pretty interesting to us. It is not nearly as volatile a business as the chip industry. And given the move to copper interconnects and a new-process geometry, a lot of companies need to upgrade their design tools. The pressure to discount has abated considerably. Thus, the quarterly volatility that these companies previously had endured has been muted to a considerable degree. There is no longer the tremendous pressure on Cadence, Synopsys and others to discount the hell out of their product to make sales during the last weeks of their quarters.
Q: What else floats your boat?
A: Some of the other companies we like a lot right now are in the computer services area. You know, boring data-processing companies that process bills and things like that.
Q: Such as?
A: We are quite keen on CSG Systems, which does the customer care and billing systems for the bulk of the cable television industry. It's a wonderful business with 38% operating profit margins, and it trades at about 26 or 27 times this year's projected earnings. It is a 20% -- or better -- growth company that buys back a lot of its stock and generates tons of cash. And it is run by one of the best management teams in high-tech. We love stories like that.
Q: So do we.
A: Unfortunately, there aren't enough of them.
Q: Most unfortunate. Thanks Paul.>> |
