John C. Levinson of Lynch & Mayer and Catherine Arnst of Business Week on Aug. 20 discussed investing in high tech, subject of the Cover Story in the Aug. 28 issue of BW.
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OnlineHost: Good evening and welcome to Business Week Online's regular Sunday evening conference. Tonight's topic is investing in high tech -- and how to navigate in this sizzling market. Our jumping-off point is the Cover Story in the current issue of Business Week (Aug. 28), and for our discussion we have one of the authors and a top investment manager.
John C. Levinson is senior vice-president and portfolio manager at Lynch & Mayer, a New York-based investment management firm with more than $6 billion in equities in the portfolios it runs. John Levinson is -- among other things -- primary portfolio manager for TechVantage, a $50 million technology hedge fund. Before joining Lynch & Mayer in 1993, he was for 13 years a securities analyst at Goldman, Sachs responsible for a variety of technology companies.
For eight consecutive years he was a member of Institutional Investor's All-American Research Team, including five years as #1. John Levinson holds a bachelor's in chemistry from Lafayette and an MBA from Carnegie Mellon. John's screen name for tonight is Jclevin.
Also with us tonight on stage is Catherine Arnst (Arnst bw), associate editor of Business Week, whose principal beat is telecommunications. She follows everything from small startups to the newest interactive technologies. Cathy Arnst came to the BW staff in 1992 after working for Reuters in London, Boston, and New York. She has a BS in journalism from Boston University.
The moderator of tonight's conference is Jack Dierdorff (JackBW), consulting editor of Business Week Online. And now on to our discussion of investing in high tech, the technologies with the most promise -- and the questions you send us here on stage via the Interact button.
JackBW: Good evening, everyone.
Jclevin: Hi, Jack and Cathy, good to be here.
JackBW: Thanks for joining us, John Levinson, and welcome. Hi, Cathy.
Arnst bw: Hi, nice to be here.
JackBW: John, I have an opening question for you. Here goes.
Question: Technology stocks have had a spectacular run. Can they continue producing dramatic rewards for investors?
Jclevin: Certainly I'm wary that we're well overdue for a correction in tech stocks. Nevertheless, I think we're probably three years into a 10-year bull market for tech stocks. We have the broadest list of long-term product cycles that the industry has ever had, and technology is just beginning to be regarded as the fourth primary factor of business, joining labor, land, and capital. I think this has a long way to go.
JackBW: Your turn, Cathy -- here's an opener for you.
Question: The BW Cover Story focuses on seven high-tech groups: giants, software, online, PCs, chips, networks, and telecom. Technologically speaking, which are the hottest?
Arnst bw: Software and networking equipment are the two groups with the hottest stocks. Netscape also highlights the excitement in Internet-access companies, which fall between software and online services.
Jclevin: Online is bound to bring about the largest social changes the world has seen since the phone and the car. That promise, plus the availability of capital, is leading to tremendous technological innovation. Don't forget that the government is finally deregulating telecommunications, which should stimulate online and the Internet even more.
JackBW: VERONICA1Z in the audience asks the next one.
Question: I've been following the stock of a company called U.S. Robotics, and am curious as to how a relatively small company can command a price of over $150 per share - is the runup in price a reflection of investor confidence in the industry in general?
JackBW: John?
Jclevin: Their business is going bananas, first off. They have well exceeded expectations in terms of earnings. Also, they've had the foresight to invest in the next year's hot technologies well before they're obvious, which breeds confidence in the future. We own it, and still love it. One note: I will tell you what we own. Please note that we will often add to or cut position sizes many times through the course of a year. But I'm more than willing to tell you what we own at this moment. Things change quickly .
JackBW: RALIEN2 tosses us this question. Maybe both of you have thoughts -- John, you first.
Question: Is there any way to separate the hype and find something concrete to base a decision on?
Jclevin: The hype is always part of the game, and the best thing one could possibly do is figure out where the hype will be next, and buy those stocks. (I'm serious.) More to the point, I will invest only in companies with a strong wind-of-change at their backs. This often leads me to areas that are not widely recognized. I don't put heavy weight on stock valuation. The best stocks are those that can achieve all three of the following: (1) revenue acceleration (new products, management...), (2) margin improvement, and (3) p-e expansion (still some hype left).
Three favorite stocks that meet these criteria: Computer Associates, Octel, and America Online (this is not a paid ad, by the way).
JackBW: Cathy, you want to add?
Arnst bw: We listed some tips in this week's Cover Story. Be sure you really understand the business the company is in, and then pick the No. 1 or 2 player in that industry segment. Also, try to find companies whose p-e ratio is lower than its projected earnings-growth rate. That's a good way to judge an overhyped stock.
JackBW: Here's the next question, taking us out on the Internet. Has it been overhyped?
Question: The hottest high-tech investment news recently was Netscape's initial public offering of stock. Do you think the market's reaction was overblown?
JackBW: John, any thoughts?
Jclevin: I'm not surprised by the tremendous first-day gain and subsequent sell-off in Netscape, and while we don't own it currently, I can almost justify buying it even at its $2 billion-plus valuation. Netscape is the only company I have seen that has a shot (be it a long one) at taking the high ground from Microsoft. Long term, that is. It's way too early to have any confidence in such a thing. Some people are estimating $100 million in 1996 revenues for Netscape. I personally think they have a shot at doing a multiple of that, in which case it's probably not a bad investment at the current price.
JackBW: Try this from Tom5057101.
Question: What impact will the recent merger activity in the entertainment and media businesses have on the high-tech group?
Jclevin: (Chuckle). First off, I think that new media (truly interactive entertainment and services) will probably not be something that the "old world" publishers and TV companies, etc., will quickly adapt to. I don't think that the mergers of large companies make any sense if they are simply trying to get mass to attack the new-media opportunity. Alternatively, there are some small and big companies that do "get it," including Intuit, AOL, and Viacom (my favorite of the old-world companies -- MTV and Nick are truly creative).
One of the interesting ways to invest in the discontinuity in media types is to buy AVid Technology (we do not own it) and Discreet Logic (we own it), which are leaders in new-media editing systems, and Adobe and Macromedia (we own both) as content development companies.
JackBW: Cathy can add from her work on the telecommunications beat.
Arnst bw: Once telecom legislation is passed, as expected, this fall, the phone companies, especially the local phone companies, but also long-distance, will most likely step up efforts to form alliances with content providers. Expect some activity, either through mergers or joint ventures or equity stakes, from that sector.
Jclevin: I think tons of money will be spent by telephone service companies to try to "get with it," especially as every one of their reasonably protected franchise businesses comes under fire from deregulation. My philosophy on investing in telecom is simple: Don't buy many, if any, service companies because it is not completely obvious that the wind is at their back. Every one will be under attack from someone else.
I much prefer to buy the "arms suppliers" to this telecom services battle royal -- in long distance, local, wireless, cable, etc. My favorites (we own all of them): General Instruments, Qualcomm, Ericsson, Nokia, Motorola, Spectrian, and LSI Logic. And Winstar Communications (I forgot that).
JackBW: Gee, we've waited all this time for the name Windows 95. Here's MikeMerc.
Question: With Windows 95's coming-out party just days away, can you look at Apple Computer's prospects? Is it going to get left behind in this high-tech boom -- or is it going to become a leader again?
Jclevin: Re Apple, it certainly is a contrarian's moment to buy Apple, because everyone in the Western World has known for a year that this date was approaching. I am rather neutral on Apple, and prefer to identify companies where I think positive change is much clearer. I have a luxury, in that I don't have to invest one way or the other in Apple; there are so many other choices.
Since we all have our favorite Win95 stocks, let me mention mine: Big Daddy Microsoft, where I think the world is way underestimating the benefit from this product cycle over the next 18 months; Symantec, Adobe, MicroWarehouse, Compaq, and a bevy of disk-drive companies and component suppliers.
JackBW: Back to the basics of investment vehicles, here's one from GoBucks10 in central Ohio.
Question: I am 34 and single, and am thinking about putting some money into a high-tech mutual fund. Is it too late to make a good return?
Jclevin: I thought it was too late in March (smiling). For more than 10 years, U.S. technology stocks have had a correction averaging 10% to 15% a year before resuming the bull phase. The rally we currently are in is in its 13th month, twice as long as the historical average, and the group is up, depending on the index, between 85% and 105%, more than double the average bull leg. While we are way overdue for a correction, I am not smart enough or dumb enough to try to call it. My advice would be to pick a fund run by a well-regarded portfolio manager and put money in periodically (monthly?). Don't try to time it. You might be lucky, but...
Just to add one more thing -- as far as valuation goes, the technology group today has a p-e of 1.75 times the market, up from a market multiple just five years ago. However, this is well below the 2.5 times the market multiple that the group held for three years in the early 1980s. I think the fundamentals of the group and growth prospects for technology are as good looking forward as they were at any time in the past. I have no reason to think that multiples over time can't go somewhat higher.
JackBW: John, JudyJudyJ wonders if there's anywhere to look besides technology for excitement.
Question: The techies have done so well the past two quarters. What do you think is the industry to be looking at now that has the same prospects?
JackBW: Or would it be heresy for you to look elsewhere?
Jclevin: I have spent a lot of time trying to find "technology-related" companies to invest in. These are companies in nontechnology industries that are using dirt-cheap and ubiquitous technology to change the business that they are in -- often, without much competitive response possible from the existing leaders in their respective industries. These companies tend to grow somewhat slower than tech companies. Nonetheless, they have far fewer competitors and more stable financials.
Favorites in this area include: Itron (automating the meter-reading for utilities), Sitel (a telemarketing outsourcing company), Quintiles Transnational (an FDA-approval outsourcing company), Desktop Data (an accumulator of content for online use), CBT Group (a CD-ROM-based training company), and Fritz Companies (a freight-forwarding and logistics company). I'd love to find more of these special situations.
A more direct answer to your question might be biotech and medical technology -- but I don't know.
JackBW: Cmcknett in Newbury Park, Calif., has a question about IBM. John and/or Cathy?
Question: It seems like IBM is trying compete with Microsoft in the PC software business by buying companies such as Lotus. Do you think they will also try for a company that makes software development tools such as Borland?
Jclevin: I don't think IBM bought Lotus for its PC applications. If so, they better hope for a V-type recovery. I think IBM bought Lotus exclusively for Notes, because IBM wanted to buy significant growth opportunities. IBM has completed its financial turnaround and business reengineering in its key areas. It must now begin to grow, or it will be in trouble. I think Lotus Notes is a smart beginning for IBM (we own IBM).
JackBW: We've had mentions of Brooktrout on the BW Online Message Boards. Now this:
Question: Have you heard of a company called Brooktrout Technology -- if so what do you think of it?
Jclevin: I only know enough about it to be dangerous. So I don't really have anything to say about it.
JackBW: Here's someone (Prose wit in Bountiful, Utah) who asks about the future of capital, in a way.
Question: Seems to me that the new computer/World Wide Web/Internet technology is extraordinarily accessible to a wide range of highly intelligent, thinly capitalized people who will be able to compete by virtue of their ideas. Capitalization will not be as important.
Jclevin: I 100% agree. We could call the Internet the "Great Equalizer" from about 100 different angles. This is why, to me, it's likely that the Internet will have such unbelievable impact on society.
Arnst bw: One of the fascinating aspects of the new technologies is the low barriers to entry.
JackBW: Stebor2 reaches us from Pasco, Wash., with this question.
Question: Any comments on the recent runup of Cyrix? They are supposed to be releasing their Pentium-type processors any day now.
Jclevin: Cyrix continues to face the challenge of trying to stay a half-step behind Intel, which has accelerated its development of new-generation microprocessors, and also successfully accelerated its manufacturing capability. Even if Cyrix's chip works right out of the box, or right out of the gate, the economic landscape for its products, as dictated by Intel, is likely to pose a challenge to the company. We'll have to see who Cyrix is able to sign up for the M-1 and its follow-ons, and what price it'll get for the chip. I'm not long the stock (Cyrix).
JackBW: Suddenly, we're out of time. This has been fascinating, John and Cathy. Sorry we have to cut it off.
Jclevin: Thanks, everyone.
OnlineHost: Thanks to John Levinson of Lynch & Mayer, Catherine Arnst of Business Week, and all the BW Online team for this conference on investing in high tech. And thanks to all of you on AOL, with apologies to those whose questions we didn't have time for.
If you'd like to contact John Levinson afterward, you can reach him here on AOL under the screen name JCLevinson. However, John Levinson will be offline for a few days. So don't expect an instant answer to your e-mail.
And if you'd like to keep talking here, we invite you to move to the BW Online Chat Room or post comments and questions on the BW Online Message Boards (try the Economics & Finance category). Transcripts of all BW Online conferences are available soon after the event (look under Talk, Special Events, or Search BW).
Join us here in BW Online on Monday, Aug. 21, for a conference on making the most of Windows 95, with Symantec's Gordon Eubanks and Steve Wildstrom of BW's Technology & You column (9 pm ET, Bowl). And on Wednesday, Aug. 23, we'll be talking about small business and the Internet with BW's Gary McWilliams and Evan Jones of TSI Soccer (8 pm ET, Coliseum).
And, of course, every Sunday at 9 pm ET Business Week Online will be here in the Globe for our weekly conference with editors and newsmakers, often featuring a discussion of the Cover Story in the current issue of Business Week. Thanks again and goodnight!
Copyright 1995 by The McGraw-Hill Companies, Inc. All rights reserved.
