MICHAEL MURPHY'S TECH STOCK SHOPPING LIST
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The Two Apostles
Michael Murphy's Tech Stock Shopping List
TUESDAY'S STRONG fourth-quarter earnings report from Intel (INTC) may
have surprised most investors -- and, indeed, all but a couple analysts
-- but it didn't surprise Michael Murphy, editor of the California
Technology Stock Letter and portfolio manager. As Wall Street anxiously
awaited the earnings report of the technology bellwether, Murphy,
appearing on CNBC, confidently predicted that Intel would net 96 cents a
share for the quarter -- besting analysts' mean earnings expectations by
6 cents a share.
In fact, after the bell, Intel posted a net of 98 cents a share. In
after-hour trading, the shares reached as high as 79. Clearly, investors
were pleasantly surprised. Keep in mind that Intel stock had been under
pressure for months, reaching a low of 70 and change Monday.
How did everyone miss it? Outright fear. "Two big myths have been going
around," explains Murphy, who visited our offices today. "The first was
that personal computer sales were collapsing. And the second was that
the turmoil in Asia would have some kind of immediate and horrible
impact on the technology sector."
As Intel's earnings suggest -- and Motorola's (MOT) better than expected
results seem to confirm -- neither scenario is true. Asia's economic
problems will have some negative effects upon the U.S. economy, but it
will be smaller and longer in duration than Wall Street had imagined.
"Wall Street seemed to think we're headed over a cliff. But it's not
going to be a major fallout. It will be a minor drag [on earnings] over
a couple of quarters," Murphy says.
Consequently, Murphy argues that investors should load up on selected
tech and biotech stocks that have been dumped out of raw fear. "I think
earnings reports over the next few weeks are going to be better than
previously expected," he says. "There's been no wipe outs, no disasters.
The sentiment had grown too negative [over the last several weeks]." In
particular, Murphy argues that PC-related semiconductor and
semiconductor equipment makers are cheap, as are a slew of biotech
companies that have nothing to do with Asia but seemed to be
nevertheless caught in the downdraft.
As Intel management pointed out during its conference call Tuesday
night, PC sales are expected to increase by 17% worldwide. And in that
PC world, there are five forces to be reckoned with, and every investor
should consider owning them -- including two right now. The five are
Microsoft (MSFT), Intel, Oracle (ORCL), Cisco (CSCO) and Applied
Materials (AMAT), Murphy avers. The two to buy today, Murphy says, are
Intel and Applied Materials.
Intel, at around 75 7/16, is a compelling buy, he argues. With a forward
price-to-earnings ratio of 18, it trades at a discount to the S&P 500,
and its earnings have increased at twice the market's average, he says.
Semiconductor equipment maker Applied Materials is the other screaming
buy. To make computer chips faster, smaller and more efficiently,
computer makers are switching their production methods (for those who
care, it's to the sub-0.25 micron production and 12-inch wafers), and
Applied gained market share in 1997 and increased its research and
development. "This is how you build a great technology franchise,"
Murphy says. Plus, the stock, at a recent 29 5/16, is way off its
52-week high of 54 3/16.
Murphy also likes Lattice Semiconductor (LSCC), a stock we featured in
our January cover story, "Where to Invest in 1998." Lattice, a maker of
programmable logic devices, got clipped over the Asian fears (about 27%
of its sales are generated in the region). Worse, its Korean distributor
was declared insolvent, resulting in the loss of a $3.5 million order.
Analysts slashed estimates and downgraded the stock. But the shares are
perking up, partly because its third-quarter results, announced
yesterday, were better than revised expectations. Cisco and Microsoft
are great companies, obviously, but rather expensive in Murphy's
estimation.
On the other hand, Oracle, the database leader, is very cheap, but it
has real problems and investors might wait -- or build slowly -- a
position in the stock. "Oracle will work them out," Murphy says. "I
think investors should dollar cost average this one." Informix (IFMX), a
badly beaten rival to Oracle, should straighten out its problems soon,
while it posted a surprisingly small loss in the fourth quarter; thus,
Murphy has 5% of his assets under management invested in the stock.
But that doesn't mean everything associated with the PC should be
bought. He advises avoiding disk drive makers and commodity memory
makers, such as Micron Technology (MU), which is the eighth largest
maker of DRAMs and has "no pricing power," according to Murphy. And
despite the fact that Internet connections are growing by 80%, he would
avoid Internet software companies, such as Netscape (NSCP) and Yahoo! (
YHOO), which he doesn't believe can make money over the long term. It
would be wiser to check out the Internet hardware plays, such as Sync
Research (SYNC).
Biotechnology companies he likes include Human Genome Sciences (HGSI), a
gene sequencer with a deal with SmithKline Beecham (SBH), Chiron (CHIR),
Isis Pharmaceuticals (ISIP) and Ligand Pharmaceuticals (LGND).
While Murphy is undoubtedly one of the most knowledgeable tech and
med-tech gurus on the Street, it should be noted that he has had a bad
year. In 1997 (actually through December 18 -- the latest figures
available from his organization), his Computer/Electronic Model
Portfolio, tracked in his California Technology Stock Letter lost 21.4%.
His medical tech portfolio fared far worse, plunging 47%. Of course,
biotech stocks across the board have been weak.
That said, it's hard to argue with his central thesis: Investors need to
have exposure to the top technology companies, which have emerged as a
potent driver of the U.S. economy. "They are the true growth stocks [of
the future]," he says, and will displace the old and tired growth names
of yesterday (such as Coca-Cola, McDonald's and Wal-Mart). And to make
money, individuals have to consider buying the best names when the
outlook seems bleakest.
-- By David Geracioti
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