Technology brings out bear and bull
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally published: August 7, 2001
With the Nasdaq plunging and dot-coms deconstructing, I figured it was time to touch base with legendary Chicago investor Sam Zell.
In an interview here in mid-March, at the height of dot-com mania (you can read it again at www.terrysavage.com), Zell confidently proclaimed that these new e-commerce companies were highly overvalued because the companies themselves could be easily replicated for less money than their total market value. Back then, he was selling them short (borrowing shares and selling them, and expecting to make a profit by replacing the shares later with repurchased lower-priced shares).
In the intervening six months, the 25 worst-performing Internet stocks fell a staggering 95.7 percent, on average, from their highs. They’ve lost a collective $114 billion for their investors, according to a study by Birinyi Associates.
MUTUAL FUND WINNERS
Some mutual fund managers managed to beat the market downdraft so far this year. Here’s a list of the 15 mutual funds with the best year-to-date total return (all capital gains and dividends reinvested in the fund):
Year to date
total return (%)
Target Large Cap Growth
Schroder Micro Cap Inv.
Evergreen Health Care Y
Evergreen Health Care A
Evergreen Health Care C
Nicholas-Applegate Global Health
Evergreen Health Care B
Munder Framlington Health Y
Munder Framlington Health K
Munder Framlington Health A
Munder Framlington Health B
Munder Framlington Health C
PIMCO Gloval Innov. A
Dresdner RCM Biotech N
American Eagle Cap. Appre.
The carnage has been widespread, leading to bankruptcies, closings and layoffs.
Zell told me he covered his dot-com short sales a week ago--and then embarked on a new round of short sales on high-priced technology companies in the field of fiber-optical networking. (Those are the companies that create technologies to link computers through the Internet at faster and faster speeds than the old copper telephone wires can provide.)
Companies like JDS Uniphase, Ciena and Nortel are among the high-fliers in this field, and on Zell’s short-sale list.
Within hours of our conversation, Zell was proved right again. After the close Tuesday, Nortel reported huge gains in revenues--but still fell slightly short of analysts’ expectations. In after-hours trading on Tuesday, the stock hit the skids, and it shed another $18 Wednesday, closing at $45.38.
Zell figures it’s early in the decline for these companies.
“The laws of economics have not changed,” he reminded me, repeating comments he made earlier in the year about the dot-coms. “This is all about economic reality--and the reality is that the old economy companies are the customers for these technology firms. When the real economy slows, so will spending on technology, and the earnings of these companies. They’re still way overpriced based on their price/earnings ratios.”
On Wednesday, he confirmed he’s expecting these stocks to fall further.
But hold on. The neat thing about the stock market is that for every seller, there’s a buyer. And Wednesday morning, I had breakfast with Kevin Landis, CEO and chief portfolio manager for the $7 billion Firsthand Funds family (www.firsthandfunds.com)--a group of six mutual funds based in the Silicon Valley that invest only in technology stocks and are run by portfolio managers with firsthand experience in technology.
Landis views the current decline in fiber-optics companies as a real buying opportunity. “Panic is always an option, but rarely a smart one,” he said. “A reality check is healthy, but don’t confuse a bump in the road with a catastrophe.”
He figures that because Web usage is increasing exponentially, the growth in demand will drive capital spending in these areas. “Companies once functioned without telephones,” he reminded me. “But these days, if your phone line goes down, you’re out of business. Soon, every company will feel that way if their Internet connection is down. They have to keep spending on those connections to grow their business.”
Among the six Firsthand funds are the Technology Leaders Fund, the Technology Innovators Fund and the Communications fund. All have a different focus on technology, but there’s a high representation of these fiber-optic networking companies.
“Time is your enemy if you short these optics stocks,” he said. “This is a growing, exciting business, not a busted model like dot-coms. These companies are in the right place at the right time, as the demand for connectivity soars.”
What about the high multiples these stocks carry, I asked, referring to the fact that some of these stocks sell as high as 250 times current earnings, while slower-growing old economy companies sell for only 30 to 50 times earnings, at best.
He made a technical point: “To lose money over the long run on these stocks, the multiple has to contract faster than the fundamentals grow--and these fundamentals are growing dramatically.”
I mentioned Zell’s earlier take on dot-com stocks, that they could be replicated for far less money than the then-current market capitalization (number of shares times price). But Landis pointed out that these companies can’t be easily replicated because of their accumulated expertise, grasp of technology and ability to bring it to market.
His advice: “The average individual doesn’t know what they own, so it’s easy to get stampeded out when there’s some bad news. But ultimately, all that capital is drawn back to where the growth is, and this is a growth area. So stay in the game and let the mood swings wash over you. This decline is not the end of the world.”
The one vision that Zell and Landis have in common is a belief that technology is indeed changing the way we work and live. But while Zell thinks current market valuations on these companies are way too high, Landis is looking several years out, and says he isn’t concerned about short-term price fluctuations.
So now you have both sides of the argument, proving once again that the stock market is where money agrees to disagree--at any given price.
And that’s the Savage Truth.
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail at savage@suntimes .com. Her third book, The Savage Truth on Money, recently was published by John Wiley & Sons Inc.