Glen & Bears
As you know I was posting most of the week about the Squeeze and most of us now know that's exactly what happened.
RS was at the top of the hype list so please read the below May 4th interview, and by the way, I believe Callinan's fund shows 0% growth for the last 12 mos, but has obviously done well in Amzn lately.
Here it is.
If you're looking to invest in a hot new technology, networking or Internet company before it gets discovered, you have an interest in emerging growth stocks. Last Thursday night, Jim Callinan, portfolio manager of Robertson Stephens Emerging Growth Fund (MF: RSEGX), appeared in a MoneyLive/Compuserve chat to answer questions from investors hoping to get a piece of the next big thing. Here's what was said:
Moderator: What's the philosophy of your fund?
Jim Callinan: We buy companies that grow revenue and earnings at faster than 20% and are gaining share in emerging US industries. We look for companies that have a competitive advantage and demonstrate that advantage with much higher than average operating margins and return on equity. Finally, we visit managements at their place of business to evaluate their abilities and their willingness to protect their competitive advantage. Put simply, we are trying to buy the fastest growing companies in the United States early in their lives.
Audience: What do you characterize as an emerging growth stock in terms of market cap? Do you sell when it appreciates above a certain market cap? Define characteristics of a stock you might buy today and why (P/E, price to sales, etc).
Jim Callinan: Emerging Growth stocks range in size from $50 million to $2 billion in market cap. We sell when companies violate the aforementioned 5 characteristics or when they become too well known or too expensive. We are looking for the fastest growth companies, hence the name of our fund. I might buy a stock today with no earnings at all, if they have all of the characteristics I described previously. But usually, we look at P/E to growth rates of .66 or better. If my fund drifts to 1.0 or greater, then I know usually that I have too many expensive and highly sought after companies, and I seek to trim my most expensive and-well known companies. That is unless they have such overwhelmingly positive fundamentals that I hold the stock.
Audience: Please provide an example (technology, if possible) which meets the P/E and growth characteristics you describe?
Jim Callinan: Filenet (NASDAQ: FILE). Filenet does document management software. Its P/E is less than 25 times next years earnings, but its growth rate is over 50%.
Audience: We have been waiting a long time for small caps, as a group, to improve their returns to historical levels. Is now the time to be taking a position in a small cap fund?
Jim Callinan: We have spoken in support of your supposition, and it is my feeling that we have about a 40-60% relative move coming in small cap emerging growth stocks as opposed to small cap value. Several reasons: first, small growth stocks will continue to show 20% or more returns on equity even during recessions, while large companies will see declines of 50-60% in their return on equity. Second, small cap stocks are at the cheapest point on a P/E basis relative to large caps since 1979. When Peter Lynch began his tenure at Magellan in 1977, it was the last great bull market; it was also the beginning of a great bull market in small cap stocks that lasted until 1984. If we have a brief recession, then we will see significant outperformance by small caps.
Audience: I assume you're looking for a sizeable correction in the market sometime soon?
Jim Callinan: We just had it! I peaked out at 27% year-to-date (YTD) performance and now I'm at 19% YTD. It's a great 8% correction.
Audience: I "felt your pain" during that drawdown. What did you buy/sell during that 3-day period?
Jim Callinan: I took profits in the temporary IT consulting industry that was heavily involved in Year 2000 work, and in numerous high-priced software companies. We bought into semiconductor equipment, semiconductors and several companies that had corrected such as Filenet, Systems and Computer Technology (NASDAQ: SCTC).
Audience: Given the richly valued market, it is harder and harder for value or growth investers to find anything within reasonable price level. What do you think would be the most important thing to look for in today's market?
Jim Callinan: The most important thing to look for in this market is top line sales growth. The reason the Internet stocks are exploding and people are in denial is that they can't understand why emerging Internet stocks are selling so high. They are truly an emerging growth industry with explosive sales growth. Examples of our holdings are Excite (NASDAQ: XCIT), Exodus (NASDAQ: EXDS), DoubleClick (NASDAQ: DCLK), Network Solutions (NASDAQ: NSOL), Amazon.com (NASDAQ: AMZN), Real Networks (NASDAQ: RNWK). I am looking for the next iteration of explosive Internet names.
Audience: A month or so ago, I remember reading in Business Week that you identified several stocks that you felt were undervalued. I believe these were Check Point Software (NASDAQ: CHKPF), TMP Worldwide (NASDAQ: TMPW), and Network Solutions. I noticed TMP is up around $28 and Check Point is somewhere around $34. Any additional insight into these stocks?
Jim Callinan: Network Solutions might be overvalued in the near term because of the explosive run it had. Long term, they have an incredibly valuable franchise and a terrific business model. They supply domain name registration such as .com, .net, .org, and will be a leader in the new domain names such as .web,.host,.edu, .sex. TMP Worldwide owns the monster board and online career center, which combined make up the largest online jobsearch segment. This whole area is undervalued by Wall Street analysts because it does not fit neatly into a pageview analysis, since their compensation comes primarily from employers, not ad revenues. Check Point Software is under increasing pressure from an industry where no one has established a significant barrier to entry. Hence, the sales cycle is slowing down. Microsoft (NASDAQ: MSFT) and Cisco (NASDAQ: CSCO) and NetworkS Associates (NASDAQ: NETA) are entering the business.
Audience: Don't you think that people are buying Internet companies "at any cost"? Second tier no-names are suddenly being bid up in what seems to be a speculative frenzy. What characteristics or changes would change your opinion on Amazon, Excite, or other Internet holdings?
Jim Callinan: Yes, when companies announce that they're becoming an Internet company, such as K-TEL (NASDAQ: KTEL), I would avoid at any cost. There is no one who will be able to change their business model overnight to become an Internet company. It takes a de novo approach and entrepreneurs who can focus exclusively on one channel, and well connected venture backers who can introduce them to the omnipotent portals such as CIS, AOL, Yahoo!, Excite, rsim.com. etc. I believe that Amazon will have a larger market cap than Yahoo! in 12 months. Also, nothing is going to change my mind on the future investment possibilities of the Internet. The only thing that bothers me is that the Internet is becoming a stock market proxy and is not making a smooth transition from social phenomena to stock market proxy to revolutionary communications device. In other words, I would like to see usage really explode in other areas of the Net, such as e-mail, virtual private networks, business to business usage. I would also like to see real behavioral change where Americans cease in a very public way usage of another medium or activity that's markedly documented by the 6:00 news. Also, I believe that the Internet is as revolutionary as the Guttenberg Bible and the printing press. I believe that just as the printing press allowed for high level mathematics, democracy, and the rise of Protestantism, so too will the Internet radically change our society.
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