NEW YORK-Despite the well-deserved drubbing of many dot-coms, communications companies, particularly equipment and component suppliers, are well worth investing in, securities analysts said June 14 at The Bear Stearns Companies Inc. Technology Conference.
The year 2000 has the look and feel of 1994, when the personal computer was the catalyst, except now the drivers are the Internet, broadband connectivity, wireless communications and fiber optics, one money manager said.
“Overall, the industry is on fire, the fundamentals have never been better and we are in uncharted territory on the up side in terms of positive vs. negative (earnings) surprises,” said Paul Wick, managing director of Seligman Technology Group’s $13.5 billion Communications and Information Fund.
“We want to own stocks of [semiconductor] companies that own manufacturing facilities, many of which have been dead in the water for years,” he said.
“We are refocused on wireless, [local area network] and [wide area network] … The cell phone industry will drive a lot of positive things happening in electronics.”
Wireless, fiber optics and broadband access companies are also high on the “must buy” list for James Cramer, co-founder of TheStreet.com.
“I am very bullish on wireless and fascinated with [digital subscriber line],” said Cramer. “I would buy (stocks of) equipment vendors and short (the stocks of) companies installing the equipment.”
Companies whose securities are desirable investment vehicles are characterized by “super high growth,” even during short periods of economic slowdown because their corporate spending cycles are hitched to long-term economic cycles, he said.
“Tech spending will be healthy, and the tech sector will be the most consistent in its growth. Private investment in communications equipment is at an all-time high since 1980,” said Elizabeth Mackay, Bear Stearns’ investment strategist.
“The problem for the overall market is whether these companies will become victims of their own success as (performance) comparisons become more difficult,” said Mackay. “What happens to [price-to-earnings] multiples in 2001 if we see momentum flag?”
Mackay said she looks favorably on stocks of companies engaged in outsourced services for other companies. Within five years, outsourcing could be a $350 billion industry, compared with $75 billion now, and account for 72 percent of the cost of goods vs. 15 percent today.
Asked by a Bear Stearns colleague which kinds of companies the investment strategist would advise avoiding, Mackay offered this response: “I work for a brokerage firm, so we don’t short stocks. We call them `neutral.’ “
Within the technology sector, analysts agreed, there is an oversupply of two kinds of enterprises-dot-coms and companies of various kinds lined up to go public.
“Ten years ago, when the screen was too small, there were 30 high-tech [initial public offerings],” Wick said.
“In 1999, when there was no screen at all, there were 300 high-tech IPOs. During the first quarter (of this year), there were more than 100 (such) IPOs and a huge, bulging pipeline with a few hundred in registration as of April,” Wick said.
“There is (investor) fatigue of over-hyped, money-losing companies. (For example,) the first trade of Palm Inc. was the absolute high of that stock. Retail and day traders are tired of losing their shirts.”
Of dot-com companies, analysts said those involved in electronic retailing have the least hope of long-term survival, particularly because the country also has an oversupply of bricks-and-mortar stores and mail-order companies.
“There are dynamite class-action (lawsuit) opportunities against the [banks] that brought these companies public because they never should have gone public … It’s a real sham, but everyone had a good time while it lasted,” Cramer said.
“It’s embarrassing to be around the [many] venture capitalists out there still kidding themselves there are good opportunities in e-tailing, which has always been a crummy business because of the money those companies have to pay to companies like Microsoft (Corp).”
Internet companies should be evaluated on the basis of their fundamental, underlying business “once you peel off the Internet wrapper,” said Brian Salerno, portfolio manager for Munder Capital Management.
“The Internet is a technology layer that impacts everything, and we are in its early stages. In five years, it will be 10-20-30 times more important than it is now.”
