A large cap tech stock manager in today's Barrons likes companies involved in industry move to finer linewidths. See the end of the article. Sorry, I don't have a link.
Jay
It Sure Beats the Coffee Houses
A techie with a conservative streak
By Barry Henderson
Fund of Information | Fund Scope | Cash Track
It all started with the coffeehouses. In the 1940s and 1950s, Spiros Segalas'
father, a general contractor, put them up all over New York City. Along the
way, he bought some stock and from time to time put up shares as collateral
for construction loans. The younger Segalas, his father's chief lieutenant even
though he was only in high school, was charged with keeping track of stock
price fluctuations on the back of an envelope.
As he started following stocks more closely he experienced an epiphany. "It
occurred to me that this really beat working if you could figure out which way
these things were going to move," he says, laughing. He was really smitten
when, after college, his father gave him $1,000 and he invested it for a 50%
return in a few months. (Segalas scored his first big win when he bought up a
few shares of a tobacco company that was coming out with the first filtered
cigarette. He claims to have first spotted the company in Barron's.)
After a tour of duty with the Navy in the mid-1950s, Segalas came back to
help his father for a few more years before deciding to try to make a go of it
in money management. After sending out a boatload of resumes, he landed a
job at Banker's Trust as an analyst. "I got another offer on the bank side
which would have paid more, but I really wanted to get into investment
management," he says.
From the beginning, he was interested in technology-based businesses. "I
grew up looking for growth as a technology analyst," he says. That fascination
with all things tech continues. Within the last several months, it's had a
profound effect. Segalas' Harbor Capital Appreciation fund, with about $3.6
billion under management, is 34% in technology, twice S&P's weighting.
Like other large-cap growth investors of his ilk, he owns Cisco Systems,
Intel, IBM and Dell Computer. He says he's interested in companies,
tech-related or otherwise, that can show earnings growth of at least 15% per
year. He also pays close attention to unit sales and revenue growth as a
leading indicator for the health of a business. Though he's not shy about
owning high-priced stocks, he admits that at a certain point -- usually 50 times
next year's earnings -- he starts to get a little leery.
That's one of the reasons he's steered clear of the red-hot Internet stocks. It's
still too early to call the winners there, he feels. "Very few companies [based
on a new technology] actually survive," he says. He points to the legions of
now-defunct PC makers as historical evidence.
Of course, this altitude sickness has occasionally hurt his performance. Dell is
a good example. Segalas started buying this stock when it was trading at
13-14 times earnings and the Street expected it to grow earnings at 25% per
year. When the company started growing twice as fast as expected, and the
P/E expanded to 50, Segalas began trimming his position -- three times during
the past year. In hindsight, that looks like a mistake, although Segalas still
holds some of his original stake. He also admits to pruning some Microsoft
from his portfolio this year, although it's still the second-largest position in the
fund (behind MCI WorldCom), and accounted for 3.48% of assets as of
October 31.
In addition, he tempers the highflyers
with a few low-P/E names. During the
past year, he's used financials for this
purpose. Although they're normally
associated with value managers,
financial stocks like Chase, Associates
First Capital, Morgan Stanley Dean
Witter and Citigroup all figure
prominently in his portfolio. Indeed, his
overall weighting in financials is 1.2
times that of the S&P 500.
Overall, Segalas' mildly conservative instincts certainly haven't crippled his
performance: Through December 17, Harbor Capital Appreciation returned
27.72%, according to Lipper, compared with 15.34% for the average growth
fund. Even more important, Segalas is beating the S&P 500, which returned
21.59% for the same period. This kind of performance isn't all that unusual:
Segalas has beaten the S&P 500 during five of the past seven calendar years.
So, what does he like now? MCI WorldCom, for one -- his largest position
and he sounds like he's buying more. The way Segalas figures it, the newly
combined company can produce revenue growth of 18% or better during the
next several years. That growth, he says, combined with the company's
cost-cutting campaign, could produce some eye-popping earnings: $1 per
share this year, $2 next, and $3 in 2000.
Is this kind of growth really attainable? Segalas insists it is. "When you talk
with the people who are really running things, you get the sense that they really
know what they're doing," he says. At its current price of $69 5/16, MCI
WorldCom is trading at 35 times next year's earnings. If the company can
achieve the kind of bottom-line growth Segalas expects, the stock would hit a
sizzling $100 during the next 18 months.
Besides MCI, Segalas has been buying semiconductor-equipment stocks like
KLA-Tencor and Applied Materials. "The semiconductor guys are starting to
feel better about next year, and when the turn comes, it's going to show up
very quickly in their numbers," he says. Semiconductor-equipment makers,
like the chipmakers themselves, were hammered this past summer in the Asian
financial crisis. The manufacturers cut back on expansion plans and delayed
new equipment purchases as Asian demand for their products dried up. As
that situation begins to reverse itself, Segalas thinks, both Applied Materials
and KLA have better prospects than most people realize.
Applied's equipment allows manufacturers to make super-small chips with
linewidths of 0.25 microns or smaller. The industry is in the early stages of an
upgrade to this 0.25-micron capability, and Applied Materials is the market
leader. There's a similar story at KLA, which makes yield-monitoring and
process-control systems for semi manufacturers.
Segalas admits that these are fairly aggressive picks. After all, even though the
stocks have been beaten up, he's hardly buying them off their lows. And any
time your analysis of these companies depends on temporary demand for
semiconductors, things can get a bit dicey. Nevertheless, he's got the courage
of his convictions. And the numbers to back them up. And he's still crazy for
managing money after all these years: "I think people that work in this business
are privileged."
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