From today's IBD .....
CPQ RS up to 89
CPQ mentioned in this article:
PaineWebber Large Co. Sticks With Tech Manager Gould Says Fundamentals Will Pull Leaders Through
Date: 2/24/99
Author: Peter McKenna
Jane Gould can make you feel so good about tech stocks that you forget for a minute what kind of trouble many of these erstwhile market darlings have fallen into in recent weeks.
Gould, 60, manages PaineWebber Pace Large Company Growth Equity Fund , a $345 million fund that depends heavily on the performance of its 21% stake in large-cap tech stocks. Gould buys large companies that show strong earnings acceleration and that sell at a reasonable valuation.
The fund's largest holdings include Cisco Systems, Dell Computer, Solectron, Tyco International, MCI WorldCom, Microsoft, Intel and Compaq Computer.
The fund is rated A+ by IBD as its total return of 121% in the 36 months ended Jan. 31 beat 98% of all funds. It was up 5% for this year going into Tuesday.
The washout of tech stocks in recent days has not shaken Gould's confidence in their future performance. Based on 37 years of experience judging the value of stocks, she believes the fundamental strengths that rocketed these stocks to their market-leading position during the past three years are still in place and are not about to evaporate now. The 7 point jump by Dell and 6 point jump by Microsoft Monday and Tuesday seemed to support her point.
''It's all about earnings,'' Gould said. ''A sound fundamental argument can be made that growth companies whose earnings are intact will continue their upward momentum for at least the rest of this year.''
Gould thinks the earnings of companies such as Cisco and Solectron will remain strong this year, handily beating the S&P 500.
''The earnings estimate for the S&P is from 0% to 5%,'' she said. ''These two companies, and many other companies in the tech sector, are growing at a lot faster rate. We think Cisco will grow at a 30% rate this year, and Solectron will grow at 40%.''
The recent slump in tech stocks has been blamed on high valuations. But Gould believes the valuations are not unreasonable, given the strong earnings posted quarter after quarter by tech stocks.
''The P-E ratios of many tech stocks, relative to their growth rates, are not as astoundingly high as many people think,'' she said. ''Solectron, for example, is selling at 35 times this years' earnings, but it has a 40% earnings growth rate. That's not out of line.''
Gould also has confidence in Dell, the fund's second-largest holding. It disappointed investors recently when its revenue growth rate slowed.
''People flee from stocks when there is a disappointment in the sales figures,'' she said. ''But if I didn't already own so much Dell, I would buy more. The stock has had such an astronomical run that it was bound to slow down, but it is still a growing company.''
Gould says she ''missed'' the run-up in the Internet stocks, and maintains only a small position in America Online.
''The fund's performance would have been better if we had owned the Internets,'' she said, ''but we held back because of their high valuations. At this point, I wouldn't know which one to buy.''
She does not believe the tech stocks will be hurt badly if the Internet stocks come crashing back to Earth.
''I disagree that the Internet stocks are a proxy for the tech stocks,'' she said. ''If they crashed, the techs would come down, but there is no way in the world that the Internets are going to permanently threaten Dell or Cisco.''
Gould's nontech holdings include Merck, Bristol-Myers Squibb and Schering Plough . The fund also has a 17% stake in financial stocks, including Citigroup and BankAmerica. There is one wild card that could upset Gould's rosy view of large companies, and that is inflation.
''Large-cap stocks with high valuations would suffer more than other stocks if inflation hits and interest rates go up,'' Gould said. ''Inflation is one thing that scares managers to death.''
Gould, however, does not believe that inflation will be a problem for some time. ''We are not afraid that rates will go up any time soon, but we are watching for signs that this situation is changing,'' she said.
The fund is part of PaineWebber's Personalized Asset Consulting and Evaluation System, or PACE. These funds, for a maximum net annual fee of 1.5%, offer investors personal services, primarily asset allocation advice.
Also:
Dell Unleashes Own R&D To Tackle Network Market
Date: 2/24/99
Author: Michael Tarsala
Dell Computer Corp.'s research and development team flexed its small, but growing, muscles to help bring a new storage technology to market.
On Tuesday, Dell became one of the few companies to ship products needed to build so-called storage-area networks for systems running on Microsoft Corp.'s Windows NT.
SANs - basically a storage computer and the hardware and software to access it on a network - let companies house data outside of server computers. SANs have advantages over storage housed on network servers, say product makers. They claim SANs make data easier to manage and products cost less than storage on the network server.
Also, SANs can help programs run faster over a network and can quickly back up data on a business, or enterprise, network.
''It's an indication that Dell wants to be a major player in the enterprise,'' said David Hill, an analyst with Boston's Aberdeen Group Inc.
The company is coming out with SANs ''for the same reason Willie Sutton wanted to rob banks,'' Hill said. ''That's where the money is.''
Another aspect of this product announcement caught analysts' eyes. Dell's R&D staff co-developed the SAN software. It's a sign that Dell plans to create more high-end computing technologies, analysts say.
Dell - the second- largest seller of PCs in the U.S., behind Compaq Computer Corp. -generally adopts the innovations of other companies.
''Some people are surprised that we're getting out ahead in this market,'' conceded Tejas Vakil, vice president of Dell's storage marketing.
Dell says it expects to devote more R&D into storage and other high-end business computing lines in the next few years. Dell employs 70 engineers in its storage R&D group, says Kevin Reinis, a Dell marketing director. The company began selling storage products in June.
In the fiscal year ended last month, Dell spent $272 million on R&D, or 1.5% of its $18.2 billion in revenue.
But that figure lags those of rivals. Dell nemesis Compaq spent $1.4 billion, or 2% of 1998 revenue, on R&D. Compaq is the leading seller of NT storage - including SAN -products. And EMC Corp., a leading storage player that also makes SAN for NT, in 1998 spent $315 million, or 8.3% of sales, on R&D.
Analysts say SAN products will become more important in corporate networks in the next three years. The fledgling SAN market could grow to $15 billion by 2002, Dell predicts.
So far, most SANs have worked with mainframe and Unix computers - not NT. Microsoft has been working to boost the performance of NT to better compete against higher-end computers.
EMC holds a technology edge over Dell and others, analysts say. EMC targets the high end of the NT storage market. Its systems typically cost more than $1 million.
Dell's SANs will target midrange NT networks. Dell will offer a system that connects four midrange servers to 720 gigabytes of storage for less than $250,000.
''Our goal is not to compete head to head with EMC in the high end,'' Dell's Reinis said. ''They've been in that market space a lot longer.''
EMC and Dell likely will meet in the middle someday, says John McArthur, an analyst with Framingham, Mass.-based International Data Corp.
On Tuesday, Dell unveiled several new hardware products to build a SAN. They include network switches that use Fibre Channel technology to direct data between servers and a storage computer. The company also shipped new hardware to connect data kept on tape libraries to the storage network.
The software for controlling the SAN, developed with Microsoft, lets companies adjust to changes in corporate storage needs. More storage space can be given to one server and taken away from another with the software.
Dell handed off the software to Microsoft and is licensing it from the software maker. Analysts expect Microsoft will license the software to other hardware makers. Parts of the software could be included in Microsoft's Office 2000, the next version of NT.
Handing over control of the software might seem unconventional, but Dell's strategy makes sense, analysts say. Dell believes Microsoft can make this SAN software widely accepted. If the software proves popular, Dell is the first company with products out that use it. And Dell has more experience with the software.
Hewlett-Packard Co. used a similar strategy in helping Intel Corp. develop underlying technology for the chipmaker's Merced server processors, expected next year. HP has the advantage of knowing the technology intimately. This could help HP release products faster and develop better products that use Merced.
The SAN strategy also clearly benefits Microsoft, analysts say.
''What Microsoft wants is anything that will help build its credibility for running enterprise applications,'' IDC's McArthur said. ''This is a step along the way.''
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