10 Questions With Amerindo Investment Advisors' Matthew Fitzmaurice
By Ian McDonald
Senior Writer
7/4/01 7:00 AM ET
Yes, the Internet has changed the way we work and live, but Net stocks have been a flaming money pit over the past 18 months. Their collapse has Matthew Fitzmaurice and his colleagues at Amerindo Investment Advisors on the canvas, but he sees reasons to keep swinging.
Fitzmaurice, the New York money management shop's chief investment officer, concedes that things aren't looking rosy given the cliff-dive in tech and telecom spending at big companies. After all, the Amerindo Technology fund, perhaps the most aggressive Net fund out there, is down more than 64% over the past 12 months, compared with a 53% loss for the average tech fund, according to Morningstar.
Despite the carnage, Fitzmaurice says the days of steep Net-stock gains didn't end last year. Few Net companies will become juggernauts, he says, but those that do will post boffo gains once the malaise passes. Lest we forget, the firm's Technology fund followed its 84.7% gain in 1998 with a 249% gain in 1999. Though the fund is less than 5 years old, the firm's principals, led by Alberto Vilar, have been fishing in the emerging tech pool since 1980.
Their fund is too aggressive for most investors, but few if any have more experience investing in this corner of the market. If you're a Net believer, or a skeptic who wants to hear the bull's case, Fitzmaurice's perspective is a must-read.
Talking With:
Mathew Fitzmaurice,
Chief Investment Officer,
Amerindo Investment Advisors
Fund: Amerindo Technology
Assets: $160 million
1-Year Return: minus 64.6%/trails 83% of peers
3-Year Return: 8.1%/trails 70% of peers
Expenses: No-load/2.13% annual expenses
Top-Three Holdings:
Brocade Communications (BRCD:Nasdaq - news - commentary)
Homestore.com (HOMS:Nasdaq - news - commentary)
eBay (EBAY:Nasdaq - news - commentary)
Sources: Morningstar and Amerindo.
1. Tech and telecom-equipment spending is down this year; it could be down next year. What's your case for tech today?
Fitzmaurice: We have to retest the basic premise: Does the Internet as a medium change the way we live and do business? Our answer comes back unequivocally: It does. The wealth that's going to be created from this is going to dwarf anything we've heretofore seen.
We want to be invested in companies that fall into essentially three categories. The first category is infrastructure companies that allow you to take advantage of this new medium. The second contains two categories that I'll lump together: B2B and B2C [business-to-business and business-to-consumer, respectively]. The final category relates to those companies that are facilitating the overall telco infrastructure.
It's been a brutal environment in these areas. What time frame are you using as a marker for when things start to come back?
Fitzmaurice: The relevant time frame is at a minimum 12 to 18 months. But what we like to think about is three to five years, maybe out as long as seven years.
We're making investments in companies. We stay relatively narrow, so we have 20-some odd companies that we care about. In a group of 10 of those companies, we assume that two to three of them are going to be huge returns -- five times, 10 times -- several more will be percentage returns 20% to 100%, and the balance becomes largely irrelevant.
That's how we've done it for 20-some odd years, and that's how we're going to continue to do it. The only way that works is if you take a longer time horizon.
2. How do you go about assigning valuations to companies in the Net sector? That's been an elusive task.
Fitzmaurice: The way we think about valuation is there are bands where it's outrageously cheap and bands where they're outrageously expensive. Those are extremes, and we saw those extremes. We're seeing the unreasonableness at the bottom here in terms of valuation, and we saw the unreasonableness at the top.
In between, we focus less on valuation, because if you get it right, you miss the mark so wildly as to what a company can earn, that the valuation always appears expensive.
If you go back to the early networking phase of Cisco (CSCO:Nasdaq - news - commentary), Wellfleet, Ascend, Cascade, they were all viewed as exceedingly expensive. Yet if you held all of them, you would have made money through their IPO through to consolidation. But obviously if you'd have held Cisco, it didn't matter where you bought over the last 10 years, until the last six to nine months -- you were always fine. And there were huge cycles. Typically every 12 to 14 months, there were 40% to 50% corrections in Cisco.
So our view is, outside of the 10% bottom and 10% top, valuation becomes less relevant. What's more relevant is: first, size of market opportunity; second, does this company have disruptive, sustainable technology; and third, do they have the management to execute it?
The Bumpiest of Rides
In each calendar year the Amerindo Tech fund has either beaten or trailed more than 90% of its peers.
Source: Morningstar. Returns through June 29.
3. If there are bands where some companies are incredibly expensive and other companies are incredibly cheap, what are a couple of companies that go on each end?
Fitzmaurice: Nothing's exceedingly expensive. Well, we are less interested in companies that are taking advantage of older technology, which we refer to as client/server based companies. Arguably, they're expensive because we think the fundamentals continue to problematic.
Folks that are more related to the PC world.
Fitzmaurice: Yes. Conversely, there are companies that are taking advantage of the Internet as a medium which are dramatically undervalued as you look out 18 months. When you get out further, three to five years, it's ridiculous.
Take even a difficult sector like the telco-infrastructure space. Companies like Sycamore Networks (SCMR:Nasdaq - news - commentary) and Corvis (CRVS:Nasdaq - news - commentary). Corvis has about $850 million in cash; it's trading at a $1.3 billion rate. That implies $350 million to $400 million in enterprise value. And if you take a discount to 2002's estimate to $200 million, which is about a 40% or 50% whack to the current estimate -- I think, that's my recollection -- you end up with the stock trading off of 2002 at two times 2002's heavily discounted revenues that have already been cut.
4. I know you folks look into the private market to dig up the big trends in new technology. What are you seeing now?
Fitzmaurice: It's our view that storage is going to be a huge area. There's no real secret in that, but most of the innovation on the storage side will come from great private companies.
We like wireless, too. We haven't lost sight of the fact that wireless is going to be very important. As a result we continue to look at chip companies that are going to provide the building blocks for wireless services systems companies.
Have you folks been taking stakes in private companies?
Fitzmaurice: Yeah. We continue to spend a large amount of time paying attention to the opportunities in the private space. Now, as the investor you have a lot more leverage in both price and terms.
The rate of technological innovation in the private market is going to continue. But the VCs and late-stage investors are all just going to be a lot more selective about the disruptive technology companies that get funded.
One needs to pay close attention to the private companies because there are a lot of great companies that will be funded that'll have disruptive technologies that'll be very successful over the next two to three years.
Are these companies potentially a threat to public data-storage companies that we already know about that are public?
Fitzmaurice: Generally speaking, the public companies that exist out there all are in the cross hairs of the private companies. EMC (EMC:NYSE - news - commentary) has issues, as far as we are concerned, with new technology companies that have been financed and are working on moving forward.
However, don't underestimate just how difficult it is to break in and how long it takes an end-user to adopt a new technology. What EMC does for a living is not easy, and they've got great relationships with their customers. But ultimately, in our view, technology wins out; it's just a matter of time.
5. What's your advice to investors who have been burned by technology the past 12 to 18 months who might not want to keep a market weighting in the sector through this downturn?
Fitzmaurice: Look to both price and fundamentals. We continue to be in the very early stages of a phenomenal sea change in terms of technology. It's evidenced every day in how we live and do our business.
All that happened is that stocks got to prices that were unreasonable and now they've gone to the other extreme on the bottom. It doesn't speak to, fundamentally, what's going on in technology.
Are there issues with overspending in the telco sector that need to be worked through? Yes. Are there issues with a weak economy that need to be sort of ground through and get to the other side? Absolutely. But it doesn't change the fact that the technological change brought on by the Internet is here to stay and we're in the very early stages of it. When we move through those kinds of issues, there'll be an explosive rebound of not only revenues, but earnings as well. You'll see these companies being moonshots from here.
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6. Do you mind playing a little word association? I'll mention a stock, and you tell me if you own it and what your impressions are. Let's start with Yahoo! (YHOO:Nasdaq - news - commentary).
Fitzmaurice: We own Yahoo!. We think that Yahoo! is going to be one of the long-term winners in this space, and we think that [Chief Executive] Terry Semel is the guy to get it done.
Ariba (ARBA:Nasdaq - news - commentary).
Fitzmaurice: We own Ariba. We've suffered through an enormous decline in Ariba, but we continue to think that B2B is an extraordinary opportunity and that Ariba's a company that is well situated.
The contraction in spending by IT departments has hurt all of the companies in the B2B infrastructure software space. Ariba was growing at 100 miles an hour, and when it hit the wall it looked like a large train wreck.
Ariba is a company ... we continue to care about. Our philosophy says that out of 10 stocks, there are going to be two or three large winners. You've got to let your winners run.
The natural corollary is you've got to allow your losers to fail. So, do we know yet whether Ariba is going to go from 5 back to 50 or 100? No. Are we willing to stand around and take up the pain? Yeah, for the time being, we're willing to stand around and take the pain. Usually the amount of time that we're willing to take the pain has been a lot longer than other investors.
The adjunct to this is that we don't miss Cisco, we don't miss AOL (AOL:NYSE - news - commentary), we don't miss eBay (EBAY:Nasdaq - news - commentary). We could have very easily blown out eBay when all B2C companies were painted with the broad-brush stroke that said that B2C was going to fail. We didn't.
Right. How about a company you mentioned a couple of times: Sycamore.
Fitzmaurice: We own Sycamore; we continue to be very favorable on Sycamore. Again, we think that they're close to having a new box that's going to put them in a position to be a lot more competitive. Over the next six to 12 months, we think Sycamore's going to be a huge winner from a product standpoint and that'll translate into revenues and earnings.
Amazon (AMZN:Nasdaq - news - commentary).
Fitzmaurice: We hold Amazon. It's been a name that we focus less time on simply because I think [Amerindo fund skipper] Alberto [Vilar] has been unclear as to whether [Amazon founder and CEO] Jeff Bezos' way of running the business was as closely aligned with what Wall Street wanted.
7. Do you think that this downside cycle in tech will be a bit more protracted because perhaps it was a bit more protracted on the upside?
Fitzmaurice: Not necessarily. We don't know yet whether or not April 4 was the bottom on the Nasdaq. If it turns out that was the bottom, it will have proven to be a lot like a normal cycle. What ends up happening is you have a two-quarter correction, and then it can trade sort of all over the map for several quarters, and then there's a spurt that occurs, so it'll be a two- to three-quarter spurt where a tremendous amount of performance will be garnered.
You just don't know. When you look at the chart you'll see it: The performance will be up over 100% to 400% over a 12-quarter time horizon that could have come in two to three disparate quarters and the rest have been relatively flattish or even down.
8. Every investor where they look at the returns of the past few years can say, "How did I overestimate this trend or company?" Or, conversely, "How did I underestimate this trend or company?" From where you sit, what do you think people are missing today?
Fitzmaurice: This talk about the Internet bubble, this talk about the demise of the dot-coms -- that it was all folly -- that's stuff that misses the point. Was there excess spending? Were there too many companies that were financed? Absolutely.
But it misses the point that there are more growing companies that have been created, and will be created, because of what's going on with the Internet. People are missing that the downturn does not lead you to the conclusion that it was all folly. Quite the contrary.
It's so real that [General Electric Chairman] Jack Welch continues to talk about moving every aspect of their business to the Internet. It's so real that Target keeps talking about spending hundreds of millions of dollars to move their business onto the Internet.
These are legitimate, brick-and-mortar companies saying that the Internet is going to drive revenues and reduce costs. We're just scratching the surface on that, so the opportunity is absolutely enormous for the next 10 years.
9. The negativity swirling around tech is just as palpable as the optimism was not that long ago. What's going to get us out of this downturn?
Fitzmaurice: I think you're starting to see some of it. It is useful to look at the B2C space. If you were talking to folks 12 months ago, the thought of owning a B2C company or financing a B2C private company would have been ludicrous.
You ought to have your readers look up eBay, Homestore (HOMS:Nasdaq - news - commentary); priceline (PCLN:Nasdaq - news - commentary) was a $1 stock, now looking terrific. That's not simply because the sentiment has changed; it's rooted in the fact that the fundamentals are pretty good.
What will help change the sentiment is that you'll see a smattering of companies start to say that business is OK, we're starting to meet lowered expectations. That will be followed by a couple of companies that'll say, Geez, we're actually going to exceed our expectations because we brought the bar down low enough so that we're actually now exceeding expectations. And you start to see strength begets strength.
So that's how it will play itself out.
What are your thoughts on priceline?
Fitzmaurice: priceline's one that we had owned a big position in. We continue to hold some priceline, and it's interesting to see that the fundamentals have turned out to be OK. In the travel segments, you've seen what Expedia (EXPE:Nasdaq - news - commentary) has done, so the category turns out to be a pretty legitimate, enormous and lucrative category. One of the players in the category is priceline.
And as a result, you've seen the stock trade from $1 to $7.50 [it closed Monday at $9.91]. Yeah, I can do the math; it used to trade at $100. By the same token it does demonstrate that the company has real revenues and is growing relatively rapidly, based on reasonable expectations.
10. If you had to name three "winners" within your area, what would they be and why?
Fitzmaurice: Brocade Communications (BRCD:Nasdaq - news - commentary), eBay and Homestore.com.
Why Brocade?
Fitzmaurice: Storage is becoming more and more important to the enterprise; the costs associated with it are enormous. Brocade created a new way to accomplish that. The barriers to entry, as I stated earlier, are enormous. So once you can prove [you have] a better mousetrap with enough enterprise customers and establish that the mousetrap is better, you create this wave that you can take advantage of. We think Brocade has been successful at breaking in to what is normally the domain of EMC and IBM (IBM:NYSE - news - commentary).
Brocade is one that we think the secular trends and their technology lend themselves to being a long-term winner.
How about eBay?
Fitzmaurice: eBay was the cute little company that was selling tchotchkes, turned itself into a frictionless model with little inventory, moved upscale and is selling much larger ticket items and is going to be able to somehow leverage from sort of C2C [consumer-to-consumer], B2C to B2B. So the opportunity for that frictionless model is staggering.
And Homestore?
Fitzmaurice: I don't think Homestore gets enough attention for the enormous market that it plays. The real estate market is absolutely enormous, and they have a relatively frictionless business model. They dominate the space.
They can continue to grow and expand service offerings; their revenue and earnings opportunities are going to be explosive. We will wildly underestimate how well they can do. |
