Big Funds Wish on Winstar as Losses Continue

Winstar Communications(WCII) reported better-than-expected second-quarter results Wednesday, and there's reason for mutual-fund investors to prick up their ears.

That's because top fund shops such as Janus, Fidelity and Putnam Investments have big stakes in the New York-based wireless communications concern, whose shares have sagged so far this year. Individual funds from Kinetics and Firsthand Funds have healthy bets on the stock, too.

For stock jockeys who own Winstar shares, there's the usual good news/bad news nugget that comes with big fund interest in a stock: Managers appear to be bullish on the unprofitable company, despite its widening losses. But if the pros sour on Winstar, they could drop the stock quicker than you could say sell.

Fund managers currently own 35% of the company's shares, according to Morningstar. At the end of the first quarter, Janus, Fidelity and Putnam Investments owned 10.8%, 8.9% and 6.3% of the company's shares respectively, according to bigdough.com, a Web site that tracks institutional stock ownership.

On Wednesday morning, the company posted a $2.32 loss per share for the second quarter, narrower than its $2.35 loss in the same quarter last year, but wider than its $2.06 loss in the first quarter. Analysts were expecting a loss of $2.53 a share. Revenue surged 83% to $176.3 million. The stock was up 93.75 cents, or 3.1%, to 31 in midday trading.

These investors are betting on Winstar's early lead in what's called the fixed wireless, or "last mile," business. Essentially, Winstar places dishes on rooftops that provide companies with fast broadband voice and data transmission, as well as Net access, without having to tear up streets to connect buildings with fiber-optic cable. With less than 10% of buildings in the U.S. having fiber-optic cable connections, and Winstar having most of the country's largest markets covered, its prospects could be vast. The stock's calendar year returns from 1995 through 1999 averaged 56.1%, compared with 28.7% for the S&P 500.

"Long term, we think this is a great value," says Thomas Lynch, Boston-based co-manager of the $42 million (LDUTX)Lindner Utility fund, which bought the stock in April and has a $23 average cost, according to Lynch.

"We could see the stock in the low 70s within 12 months. We think it's a great growth opportunity," Lynch says, adding that its product could see significant demand, "particularly in older cities like Boston and New York."

But Winstar's dish technology has had trouble operating in fog, rain and snow, forcing them to rethink their strategy and rely more heavily than expected on conventional fiber connections. Also, a rival broadcast laser-based system from privately held TeraBeam has caught the eye of influential commentators like George Gilder, editor of the newsletter Gilder Technology Report. Since Jan. 1, Winstar stock is down 40.1%, and nearly 50% since the end of March.

The upshot: Winstar could be in a lucrative niche if the company gets its technology straightened out and doesn't buckle under the costs of building its network.

"It's a sexy industry and investors are thinking fixed wireless is going to be a big business," says Morningstar stock analyst Todd Bernier, who calls the stock "speculative."

Many of those investors roam fund company halls, including Alan Harris of the (MNITX)Munder NetNet fund, the nation's largest Internet fund, which is currently closed to new investors.

"They've got great technology and a tremendous opportunity to get last mile [Internet] access to buildings without fiber," he says. The NetNet fund has owned Winstar for at least two years, according to Harris, who likens the company's situation to cellular-phone companies a few years ago, where the high initial costs of building cell towers eventually led to big profits. On May 31, the stock represented 1% of the fund's assets.

If the company is a leap of faith right now, several high-profile funds have jumped. Six funds currently have more than 2% of their assets invested in Winstar, including (JASSX)Janus Special Situations, (TCFQX)Firsthand Communications, and two funds from Kinetics -- adviser to the sagging Internet fund.

Inherit the Winstar Here are the six funds with more than 2% of their assets invested in Winstar.
Fund	% of Assets in Winstar	YTD Performance	Portfolio Date
(WWWEX)Kinetics Internet Emerging Growth	4.8%	-34.8%	June 30
(WWWIX)Kinetics Internet Infrastructure	4.4	-20.1	June 30
(KINGX)Fountainhead Special Value	3	-15.3	March 31
(JASSX)Janus Special Situations	2.9	2.3	April 30
(POPAX)PIMCO Opportunity	2.4	-4.6	June 30
(TCFQX)Firsthand Communications	2	0.3	May 31
Source: Morningstar. Portfolio holdings may have changed since last reported.

Despite the stock's recent downturn, several funds have had a hearty appetite, according to their most recent portfolio reports. Among the big recent buyers are Munder NetNet and (JAMRX)Janus Mercury.

Thank You Sir, May I Have Another? These five funds have bought the most of Winstar's sagging stock lately.
Fund	Shares Bought	% Fund Assets	Report Date
(TISHX)Flag Investors Communications	906,000	2.1	May 31
(SENTX)Strong Enterprise	788,000	4.2	March 31
(JAMRX)Janus Mercury	744,000	0.7	March 31
(MNNAX)Munder NetNet	600,000	1	May 31
(WWWFX)Kinetics Internet	479,000	1.8	April 30
Source: Morningstar. Holdings may have changed since a fund's latest report.

Investors in these funds might pay some attention to the stock and wireless sector in general because several fund companies including Janus have jumped on the wireless/telecommunications bandwagon with both feet.

And stock investors might keep an eye on mutual funds' stakes, too. Since they own more than a third of the company's shares, an exodus could sink the stock's price in a hurry.

Although recent funds sellers of Winstar shares have been modest compared with buyers, it shows that not everyone is a Winstar believer. In fact, even though Putnam owned 6.3% of the company on March 31, it had sold more than 385,000 shares prior to that report. Invesco, Janus' rival growth shop in Denver, owned 2.1% of the company at the end of the first quarter, but had sold nearly 500,000 shares, according to bigdough.com.

Gone With the Winstar These five funds have sold the most Winstar shares recently.
Fund	Shares Sold	% Fund Assets	Report Date
(FIDYX)Invesco Dynamics	275,000	0.3%	March 31
(NCGAX)Pilgrim Mid Cap Growth	70,000	0.1%	April 30
(NAEGX)Pilgrim Small Cap Growth	37,000	0.1%	April 30
(EVGFX)Eaton Vance Growth	20,000	0.3%	May 31
(EKBAX)Evergreen Balanced	13,000	0.1%	April 30
Source: Morningstar. Holdings may have changed since a fund's latest report.

Staff Reporter Scott Moritz contributed to this report.

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