The Institutional Investor
The Goldman Sachs Investor conference is happening this week in New York at the Grand Hyatt Hotel. Over 2,000 institutional investors are present. A complete list of the companies presenting is posted on the Goldman Sachs web site.
However, more interesting than the presentations on Tuesday, at least to us at Briefing.com, was the lunchtime panel Q&A of portfolio managers Several critical themes that illustrate what's on the minds of individual investors became apparent at this panel discussion.
Theme 1: Internet stocks are clearly overvalued, according to institutional investors. This theme, while nothing new, seems to prevalent. It is on everyone's mind, especially considering the beating that Internet stocks took Tuesday in the market. But it has never been more vocalized. At the lunchtime panel of portfolio managers, Roger McNamee of Integral Partners summarized it very clearly. "80% of these stocks will be $2 to $5 stocks in two years. The other 20% may be worth ten times what they are now." But which ones? It is too early to tell. We are "only four years into a twenty year revolution" said Mr. McNamee.
The institutional investors are not internet naive, however. They fully understand, as well as anyone can, the future impact of the internet on our economy. Bill Miller, of Legg Mason, made a point of stating that past fundamental evaluations are irrelevant when looking at internet companies. The entirely new dynamics of the internet marketplace make trailing valuations irrelevant, as explosive growth is possible for the right player. Nevertheless, this doesn't mean that one should pay any price.
Mr. Miller looks at future cash flows possible from the projected high growth rates, than discounts that future cash flow to a present value, using current interest rates. If the current stock price is under the calculated value, the stock is a buy. Using this well established valuation method, he still comes up with a maximum stock price for DELL (DELL) of $104 and $135 for AOL (AOL). The only example he gave of an undervalued tech stock was Gateway, which he fairly values at $200 per share. He owns 4 million shares, all purchased around $50.
Even Jim Cramer, of Cramer, Berkowitz Partners, reiterated the point. "If you understand what is driving [...the internet stocks...] you are a psychologist, not a portfolio manager."
Theme 2: AOL has made it out of the "internet" category, and is the role model for all other internet companies. AOL is now a blue chip, and has been for some time. The institutional investors not only are comfortable owing AOL, some own it in a big way. Bill Miller, one of the lunch time panelists, and a value investor, owns a significant position in AOL, bought last year.
Theme 3: Microsoft is no longer viewed as the technology leader. Although a critical and lucrative player in the enterprise software arena, the company is seen as a cash cow generator, not a creator of explosive new technology or business models. Over 50% of the IT directors surveyed by Goldman Sachs stated they intended to buy Windows 2000 (Windows NT 5.0), but as far as creating new industry or markets, institutional investors don't expect much. Mr. McNamee even called Microsoft (MSFT) a "bond." A "really good bond" but a bond nonetheless. What he means here is that the revenue flow, and resultant cash flow is so predictable that the fair value can be accurately calculated, as bond dividends can be. Of course, like a bond, current market value will be adjusted to current market rates. If multiples on stocks fall, so will Microsoft stock, even if earnings expectations are met.
Theme 4: The Lycos/USA Network deal is viewed more as a possible sign of a market top than a new era. At the lunch tables with buy side managers, the talk was clearly not receptive to the deal. (Buy side managers rarely want to be quoted, particularly when expressing negative viewpoints.)
Nevertheless, the overall sentiment was fairly unanimous: Lycos (LCOS) needed to do this deal for stock price reasons as much as fundamental business reasons. Any impression that they are falling behind would hurt the stock momentum of LCOS. With everyone else making a partnership deal, Lycos also had to make a deal. Would a deal with NBC, instead of USA Network, have caused the price to rise? Probably not, most at the table agreed, given the state of the market on Tuesday.
Theme 5: At some point, institutional investors will embrace internet stocks more fully than they have. Clearly interest in the Internet stocks overwhelms the interest in traditional tech stocks, like Compaq (CPQ) and Dell. @Home's (ATHM)and Earthlink's (ELNK) presentation was overflowing to the point of elbow-to-elbow standing room, with the aisles and back areas packed. There were plenty of seats at both the Compaq and Dell presentations. But few managers are buyers, judging by the low institutional ownership in both stocks.
What this means is that institutional investors are most likely to wait until the smoke clears before picking their long term investments. They cannot afford to take the "buy them all and let the winners make up for the losers" approach. Institutional investors not only have to perform, they have to present to their clients a rational explanation of how they balanced risk and return. Up to this point in the Internet revolution, few institutional investors had the "charter" to invest in internet stocks, regardless of the market returns.
However, even a dramatic drop in internet stock prices might not bring institutional investors into stocks like Amazon.com (AMZN). What they will look for is long term defensible, and profitable business models. Only AOL has shown that on the Internet. Yahoo (YHOO) may be close to being able to make the kind of case that institutional investors could accept. But for the others, by and large, most of the institutional investors are either on the sidelines with internet stocks, or, in hedge funds at least, are taking short positions. |
