From this week's Barrons.
William et al:
This article should actually be more worrisome to you than any of the articles (and you've got a myriad choices) which are specifically critical of amzn.
A wide range of tech fund managers listing the blue chips and
NOT A SINGLE ONE
owns amzn or thinks it will rebound, or has decent fundamentals
--this
from a bunch of guys who think that AOL and YHOO may be fairly valued.
September 14, 1998
Choose Wisely
With technology stocks off sharply, bottom-fishing requires
care-and courage
By Eric J. Savitz
Picking technology stocks has become a seriously hazardous endeavor.
True, a handful of big tech stocks have nicely outperformed the overall stock
market this year, including Cisco Systems, America Online, Dell Computer,
Lucent Technologies and Microsoft. But the average technology stock has
lagged the market badly. Indeed, over the past 52 weeks, the Merrill Lynch
100 technology index has trailed the S&P 500 by about 16 percentage
points. And that raises a sticky question: Has the drop in tech shares provided
a mother lode of opportunity? Or heaps of fool's gold?
Last week, encouraging comments on the outlook for profits from Oracle,
Adobe Systems, PeopleSoft, Network Associates and especially Intel gave
the bulls some comfort. Intel's Thursday afternoon announcement that
revenues for the third quarter would be 8%-10% above the $5.9 billion
reported in the second quarter, rather than the flat quarter that had been
expected, certainly is good news. Unfortunately, it came on a day when the
Dow dropped almost 250 points in a market still overwhelmed by economic
instability abroad and political scandal at home.
Still, Intel's news did help tech
stocks rally Friday, and it does
serve as a useful reminder that what
ultimately matters for tech stocks is
whether they can increase earnings,
and how fast. We checked in last
week with a half-dozen tech-stock
specialists, and their disagreements
nicely illustrate the dangers faced
by technology investors. Jump in
too early, and you could suffer
significant damage. Wait too long,
and you could miss a substantial
rally.
Standing among the skeptics is
Abel Garcia, who runs the $1.1 billion United Science & Technology Fund,
which has nicely outperformed the market this year, with a gain of about 9%
through Thursday. United Science has stayed in the black with big bets on the
right stocks: America Online, Yahoo, Cisco and BMC Software, to name a
few.
While some portfolio managers await an opportunity to buy those stocks and
others like them, Garcia has been raising cash. In recent weeks, he has lifted
United Science's cash hoard to about 15%, from 4%, and he continues to sell
stocks. Garcia worries, among other things, that worsening economic
conditions in Japan will lead to a further slide by the yen, eventually forcing a
Chinese devaluation, and then exacerbating the woes in the rest of Asia, to the
detriment of the U.S.
"The macro picture doesn't look good for tech stocks -- or any stocks," he
says. "We have long-term gains in some stocks, so we've been taking some
gains to wait for another day. I wish I could be optimistic, but I'm not. I lived
through 1974, when stocks went down 50%, and then went down another
50%. We're trying to insulate our investors from the wreckage."
Slightly more upbeat is Tony Rizza, portfolio manager with Columbus Circle
Investors, which run the Pimco Innovation Fund. Rizza says his fund cut back
holdings in stocks with large Asian exposure when the crisis cropped up last
October. The strategy paid off through Thursday, as the fund had a
market-beating year-to-date gain of about 20%.
Rizza says the fund has
concentrated on companies with a
U.S. focus, and those with
proprietary products. A year ago,
he cut back on chip stocks,
including Motorola, and beefed up
positions in Microsoft, AOL, Cisco
and Yahoo. The right stocks to
own, as it turned out. And he's
sticking with the strategy.
Still, Rizza has been searching for
new ideas. For instance, he thinks
the time has come to buy Compaq.
The PC maker, he says, has
completed the Digital Equipment
acquisition, and survived the PC inventory correction without any major
earnings disappointments and without losing its position as the world's leading
PC company. Were his fund flooded with cash, Rizza says, he'd beef up his
largest positions: AOL, Cisco, Microsoft, Intel and Dell, which together
account for about 30% of the fund's $400 million fund in assets.
"What I'm trying to do is buy companies that won't be negatively surprising,
companies with an upward bias to their fundamentals," he says.
S. Bob Rezaee, technology analyst with the $10 million Dresdner RCM
Global Technology Fund, feels a little more adventuresome. "I'd look to this
as an opportunity," he advises. "Pick your spots, but stick to quality names.
I'm not inclined to bottom-fish broken stories, companies losing market share
and having earnings problems. I'm sticking to the Ciscos of the world."
And what else? "Ascend, you have to own here," he says. "They have the
most comprehensive products for the next generation communications
network." He also shares Rizza's enthusiasm for Compaq. The PC maker, he
says, should benefit from seasonal PC strength this fall, adding, "People
underestimate the synergies between DEC and Compaq."
He's bullish, too, on Tellabs. "The stock is down over 50% -- it seems like a
good time to build a position," he says. Rezaee thinks the proposed
acquisition of Ciena could still be completed, after a further revision in the
terms. In the same category, he likes ADC Telecommunications. And he's
buying PMC-Sierra, a chipmaker that provides parts to
communications-equipment companies like Ascend and Newbridge
Networks.
Not least, Rezaee likes PeopleSoft. "The stock has been beaten down in a big
way," he says. "The whole category, enterprise resource planning software,
has become a two-horse race, PeopleSoft and SAP. They have solid
management and incredibly loyal employees. It's almost like a cult." And the
stock, he says, is a lot cheaper than SAP.
For Kevin Landis, a portfolio manager and co-founder of the San Jose,
California-based FirstHand Funds, the year has been a mixed bag. The firm's
Technology Leaders Fund has gained about 16%, sticking to the usual
big-cap suspects. Its flagship Technology Value, on the other hand, is down
about 18%, hurt by Landis's fondness for semiconductor stocks, which have
been especially hard hit in the downturn.
Bloodied, but still standing, Landis is on the hunt for bargains. "Two types of
stocks will bounce back quickly after a market anxiety attack," he says. "One,
the blue chip companies, because when people who had stepped away from
tech stocks come back to them, they'll look to names that give them comfort,
like Intel and Cisco. I'm a tech investor. I'm committed to investing in
technology stocks. I'm as close to 100% invested as I can comfortably be.
People like me are not the ones who are going to ride to the rescue. It's the
people turning up their tech weighting from 10% to 20%."
Landis would focus, too, on smaller companies where nothing has gone
wrong, other than the stock price. In that group, he especially likes chip
companies targeting the communications equipment makers. His picks, which
include some of the very names responsible for the weak performance of his
Tech Value fund this year, include PMC-Sierra, Level One Communications,
Applied Micro Circuits and TranSwitch.
Push him to pick some big-caps worth buying, and he names Ericsson,
Lucent, Intel and Texas Instruments.
When we caught up with Ron Elijah last week, he was exulting over the
cheery news from Intel, one of his favorite stocks. "A year ago, the Street
thought Intel could do no wrong," says Elijah, who runs a pair of mutual funds
for Robertson Stephens Investment Management. "Lately, its been considered
a company that can't do anything right. Now they've demonstrated that even
in the current environment, a global company can experience growth."
Elijah contends that what's really
been ailing Intel and other
PC-related stocks has been a
generational change in technology
as users move to the Pentium II
microprocessor from the Pentium,
and to 64 megabit DRAMs from
16 megs. Earlier in the year, he
says, Compaq, IBM and
Hewlett-Packard all had excess
inventory of boxes based on older
technology. As they tried to get rid
of them, he says, earnings suffered,
and demand for components
sagged. But the signals coming from
the PC companies now, he says,
suggest the transition has been
completed.
In Robertson Stephens Value Plus, a diversified growth fund, which is down
about 2% this year, Elijah lowered the fund's tech exposure from 40% at
year-end down to 12% or 13% in May. More recently, he's lifted the total
back to about 27%. He's been adding plays on a recovery in the chip sector,
including Intel, Micron Technology, Texas Instruments, and Applied
Materials.
In the Robertson Stephens Information Age Fund, which holds only
technology stocks, Elijah earlier in the year cut back holdings in
semiconductor stocks, while beefing up holdings in software stocks. More
recently he's been reversing the trend. The fund also holds a smattering of
hardware stocks, such as Compaq, Dell and Gateway. Microsoft, Cisco,
WorldCom and AOL are big holdings as well.
Lots of things about the current market environment worry Roger McNamee,
a partner at Integral Capital Partners, in Menlo Park, California. Retail
daytraders, he says, have taken control of most of the Internet stocks. "And
they have a completely different interpretation of risk than do the institutions,"
he says. "Three months ago, they saw the biggest risk as not owning these
stocks. If anyone thinks this isn't an important new variable, then they're not
thinking clearly."
Not least, McNamee warns that "from where I sit, the number of people
whose lifestyle is based on the bull market being a normal condition is a lot
higher than you'd like to see."
McNamee also sees dangers in the fact that 80% of the total market
capitalization in technology stocks involves four segments: PCs, chips,
enterprise software and data communications. All of these are exhibiting
decelerating growth. "The nightmare scenario is that all four areas go through
a sustained period of lower growth, and exert an enormous drag on the
market."
Very scary, indeed. Which isn't to say that McNamee has hunkered down to
await the worst. In fact, he's been boosting exposure to enterprise software
stocks, like Citrix Systems, I2 Technologies, PeopleSoft, Seibel Systems and
Platinum Software. McNamee has also been carefully stepping through the
carnage in the Internet sector, taking positions in Excite and Inktomi. Not
least, he has been buying beaten down semiconductor stocks, including Linear
Technology, Maxim Integrated Products and Xilinx.
"What matters most in a correction is exiting with the right portfolio. So I've
been both buying and selling into this." says McNamee, adding a worthwhile
observation: "An abrupt correction is a great clarifier of the mind."
That's a lesson millions have learned, or re-learned, the past few weeks.
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