They're Buying Tech Should You?

By Daniel Kadlec

Did Peter Lynch and Warren Buffett have it right after all? Is it possible to have a great portfolio without tech?

KEVIN LANDIS: It would have felt good over the past year. But it's generally accepted that you should have some exposure to tech.

PAUL WICK: There are going to be people able to do a wonderful job of growing their assets without technology. But given that technology is the largest growth industry in the world, you stack the deck against yourself without any tech stocks.

TIME: What if you don't want a mutual fund? What's the minimum number of tech stocks to own?

LANDIS: I know a lot of individuals who get very opinionated and may be really right about four stocks. But they own 10 because they think they ought to own 10. And guess which ones they get in trouble on? Numbers five through 10. It's safer to own mutual funds plus a few of your favorite stocks.

TIME: Paul, is four enough?

WICK: If your whole portfolio is eBay, Priceline, Yahoo and Amazon, you're not diversified. You're better off with one or two in software, one or two in networking, one or two in computer hardware and one or two in semiconductors.

TIME: What will be the dead-on tech trends during the next five years?

DENNIS MCKECHNIE: Wireless Internet, fiber-optic transmission and software--the FORTUNE 500 interacting with customers and suppliers--ought to be big.

TIME: Tech earnings have slowed substantially. When can we expect a rebound?

WALTER PRICE: I think most CEOs would say 2003 before everyone is doing well again.

TIME: Before they've worked off what they call overhang?

PRICE: It's not just the inventory overhang. Companies were spending tens of billions of dollars more than their cash flow. They have to rationalize and spend what they can afford to spend, not what they want to spend.

TIME: Will tech stocks underperform during this period?

PRICE: Not necessarily. You've had a major decline in the NASDAQ. So you've discounted a lot of these problems.

TIME: So has NASDAQ seen its lows?

MCKECHNIE: I think so.

PRICE: Yes. WICK: Yes. LANDIS: Probably.

TIME: How do you separate a tech company with a future from one that's speculative?

LANDIS: One simple question we ask is, Do they have customers who can't get along without them? Take the BlackBerry [a handheld from Research in Motion]. There are hard-core users who just can't get along without it. That's a great sign.

PRICE: Market share is important. If a company is many times larger than its nearest competitor, it has a great probability of riding through downturns.

WICK: Strong intellectual property is the key to huge profit margins and outsize stock-market returns.

TIME: You mean software? Patents?

WICK: Exactly. Unique know-how. A few years ago, I went to see a company doing their IPO roadshow. They refused to put up their slide show because they were concerned that venture capitalists would be in the room and take their business plan and shop it. That's a great example of a company that doesn't have a whole lot of proprietary content. If everything about the company can be put into a bunch of slides, then there's not much there.

TIME: Kevin, is there ever a reason to own a tech stock that doesn't earn a profit?

LANDIS: Hope. The question is, What will a company earn in 2002 and 2003 and beyond?

TIME: But how can you be sure? Haven't we just had a tough lesson in hopefulness?

LANDIS: Profits don't guarantee anything. What if a company's customers don't make money? Where we got into trouble recently was that we loved, say, our networking companies. But the customers they sold to weren't profitable. The whole food chain has to be healthy, and that's been the issue.

TIME: Paul, what do you think of cell-phone stocks?

WICK: We don't own them. For example, Nokia is a good company, but it's at a rich price. Qualcomm is a good company, but also too rich for our blood.

TIME: What about Palm and Handspring?

WICK: They're unappealing. Both are large businesses, but neither can sustain much better than break-even profitability. The valuations are in the stratosphere.

TIME: This vision of everybody walking around with some kind of handset just hasn't happened.

LANDIS: Not yet. People are only starting to play around with other uses for the cell phone. The short messaging services (SMS) and voice recognition are very primitive. Down the road you should be able to ask your cell phone for directions and get them. The pieces are there, but they haven't been stitched together.

TIME: So you're buying cell-phone stocks, Kevin?

LANDIS: No. From time to time we'll have a pretty good stake in some of the component manufacturers. We don't right now because of inventory concerns.

PRICE: I'm a big fan. I think data on wireless is going to be one of the big growth industries of the next five years as people replace their cell phones with a product with a larger screen. We own Nokia.

MCKECHNIE: The timing of the next-generation services has been a bust so far, but I would say a year and a half out we'll start to see solid service. We want our schedules, our e-mail, our stock quotes. It's a matter of better handsets, which will become available in the next six to nine months.

TIME: When we get into a new bull market, will tech stocks lead or lag?

PRICE: I think tech's going to lead because it's been in the worst bear market, and I think we've overshot.

LANDIS: Normally, what leads is growth. And what's tech? Growth.

TIME: Are there any really safe buy-and-hold tech stocks?

LANDIS: I don't think any can make you feel totally safe. But Cisco Systems, Oracle and EMC have strong franchises where you have a hard time imagining the world without them.

PRICE: Microsoft and AOL Time Warner are relatively secure. The question is how fast the companies grow, not whether they're going to have a business in five years.

TIME: Tell our readers about what you are buying now.

WICK: My favorite stock and largest position is Symantec, the leading company in antivirus software and a contender in things like vulnerability assessment. Symantec is a very well-run company, extremely profitable. They've been buying back stock religiously, and it's very cheap. I'd make the argument that security is growing as a percentage of corporate information technology spending, and it's more resistant to recessionary cutbacks. Another software company that we like is Autodesk. If you're an architect and want to translate your thoughts or drawings into a computer-generated model, you use Autodesk's drafting software. They have an absolute dominance of this business.

Software is my favorite sector. It's probably the least impacted by the telecom glut of overcapacity. But within the semiconductor space we have a number of investments, and one of our favorites is the world's largest semiconductor-packaging company, Amkor Technology. Their fundamentals right now are absolutely miserable, and they are losing money, but the stock has stopped going down in spite of the bad news. It is far and away the technology leader in semiconductor packaging.

MCKECHNIE: I'll start with a software company as well: Veritas Software. It makes software to manage storage within a corporation. Storage is growing at about 100% a year. And increasingly, corporations need to know where their data are and to make it available 24/7. Veritas is a leader in the software that coordinates this storage. I also like Juniper Networks, which is a competitor of Cisco's. They've been the one company that's been able to make its way into Cisco's market.

LANDIS: First of all, I'll chime in on Amkor and Veritas. We own both. If I had to pick one company in the networking space, it would be Ciena. We have a big position in them. It's optical networking. So that's kind of a dirty word right now. But they're really firing on all cylinders. It's not a cheap stock, but it's holding up very well in the midst of really tough conditions, and that's what great companies do. For photonic components, we still like Corning. That's going to be a great fiber-optic franchise, particularly because they make a lot of money selling the actual fiber, and one of their chief competitors, Lucent Technologies, is really a mess right now. On the semiconductor side, we've long been fans of PMC-Sierra and Vitesse. On the software side, in addition to liking Veritas, we're also big fans of BEA Systems.

PRICE: We have a lot of the stocks that have already been talked about. We're enthusiastic about Veritas, Juniper, Micron Technology, Ciena, BEA, Lexmark. I'll talk about Siebel Systems, which is a software company. I think in general we're enthusiastic about many of the software companies because they don't have to work through a lot of the inventory issues. When companies start spending again, software will get more than its share. The thing I like about Siebel is that they dominate customer relationship management software, which basically allows you to control your sales force and interact with your customer. I also like Brocade. It's the most attractive company in the storage area, where we also own Veritas, EMC and Network Appliance.

TIME: What areas are you absolutely avoiding?

LANDIS: We're steering clear of PCs, and I know that that's an industry that could be in recovery right now. But we shy away from even a whiff of commoditization.

PRICE: We just sold Dell. So I guess we're in agreement there. And we're underweight in the semiconductor area. There's a lot of capacity to chew through.

WICK: The area where we're most underweight is telecom. The industry has been in a death spiral. There are a lot more bankruptcies to come. We're particularly cautious on companies like Cisco, Juniper and Nortel Networks that supply these shaky service providers.

TIME: Dennis, it sounds as if Paul is staying away from some of the things you like.

MCKECHNIE: Where we differ is that I believe business will firm toward year end. One area I would stay away from is anything to do with the consumer. Companies like Apple and Gateway are going to have difficult markets in the next six months.

TIME: No one said to avoid the Internet stocks.

LANDIS: That's because it's a given.