Hot Hand, Cold Stock: Firsthand's Landis Takes Lonely Stand on AT&T

Something must be awry when the fund industry's leading tech-stock picker is fawning over AT&T (T).

Kevin Landis
Rare AT&T bull
firsthandfunds.com

Kevin Landis, the tech-fund manager and media darling who runs Firsthand (TVFQX)Technology Value, the nation's top fund over the last five years, has amassed some 3 million shares of the stumbling telecommunications behemoth since May of last year. That endorsement puts him firmly in the minority, as evidenced by the stock's 40% decline this year and a Morningstar survey showing just six of 86 tech funds own the stock, including two of Landis'.

With AT&T struggling in so many areas, optimism has been scarce, and many observers deem the pick rather strange -- if not worse. Why would such a whiz kid latch onto what has been one of the most disappointing blue-chips in recent history? "This is interesting because I haven't heard a lot of aggressive managers talking about AT&T being a stock they are invested in," says Phil Edwards, managing director of Standard & Poor's fund services. "He's obviously seeing something in AT&T that others aren't."

Voices Carry

Typically, Landis talking about stocks makes for an E.F. Hutton moment. After all, his Technology Value fund boasts a 53.4% average annualized return over five years, putting it first among more than 4,000 funds, according to Lipper. Over the past year the fund is up 100.4%, and it has managed a 20.4% return this year, beating more than 90% of its tech-fund peers, which are up just 0.6% on average.

It's not like Landis has lost his touch: This year he has been building his position in communications-chip and component maker PMC-Sierra (PMCS), which is now his third-largest holding. That stock, in sharp contrast to AT&T, has more than doubled since Jan. 1.

So the ailing AT&T couldn't be a more unlikely fit in the Firsthand stable. "It doesn't seem like his normal fare," says Morningstar senior fund analyst Chris Traulsen. "I'm not sure why it's in there."

Betting on Ma Bell Judging from these month-end snapshots, Landis' interest in AT&T has fluctuated, but he owned more than 3 million shares at May's end.

Source: firsthandfunds.com. Data through May 31.

Landis didn't return calls seeking comment. It's possible that he's sold the stock since the end of May, though the Firsthand site describes AT&T as "the one company that is in a position to offer a full range of telecommunications and data communications services to its customers." In any case, AT&T stock has been among the top 15 holdings of both Technology Value and Landis' (TLFQX)Technology Leaders fund. At the end of May, going by the most recent data on Firsthand's site, the stock made up 2.3% of Tech Value's assets and nearly 5% of Tech Leaders'.

Mayday

Landis' contrarian liking for Ma Bell is pronounced. In May 1999, with the stock trading in the mid-50s, he started buying AT&T shares for Technology Value and Technology Leaders. In the year ended in May 2000, he bought more than 3 million shares for the two funds. On May 31 this year, the stock was in the mid-30s; it closed Monday at 31.

One could argue that the stock fits the Firsthand funds' criteria: behemoths that look cheap or big-cap bellwethers. The stock also offers a cheap way to buy a huge, potentially valuable company. Bullish observers say AT&T is really a marketing powerhouse trapped inside a deficient technology company, and they believe the company's real service-selling strength will begin to shine once its cable systems are upgraded to handle a range of services including TV, phone and Net access.

But overhauling old cable networks is a daunting task, and it's not clear whether AT&T customers are going to be hanging around when the service is ready to be flipped on.

Blundering

And Landis' position notwithstanding, there's no shortage of reasons to avoid AT&T stock. It's not just that AT&T's overwhelming blunders have pushed big-ticket customers to sign on with rival companies, or that its consumer long-distance service is vaporizing faster than the company can project. It's not just that the tracking stock linked to its technologically challenged and capital-hungry wireless business, AT&T Wireless (AWE), was greeted with disdain when it came public in April, or that the company's massive $100 billion-plus foray into cable remains little more than a high-stakes gamble.

It is the totality of AT&T's collapse -- aside from the prospect of more tracking stocks -- that persuades investors to stay away.

"AT&T is cheap, cheap, cheap, but the problem is that it keeps getting cheaper," says Stein Roe & Farnham managing director Ophelia Barsketis, who says her AT&T holdings have gone from millions in value to thousands.

"It has been really, really hard to justify holding AT&T, especially in the last few months," says Barsketis. "It's been a steady trickle of bad news -- first their lackluster results and then the controversy regarding what it would take to jump-start the business."

Encumbered

Landis' fellow tech specialists don't love the stock either. Of all domestic stock funds, more than 80% have passed on the company's shares. Many funds that do own shares are index funds that have to buy it to replicate an index like the S&P 500. Other holders include equity-income or balanced funds attracted by its dividend yield.

"Bad, bad, bad. Stay the hell away from AT&T. ... They're just a big, old slow company with no Internet gear."

IPS Millennium Fund Manager Robert Loest

Obviously, other tech-minded managers don't see the company pulling off a remake and re-emerging as part of the New Economy.

"Bad, bad, bad. Stay the hell away from AT&T. They're encumbered by a worse-than-average bureaucracy," says Robert Loest, manager of the tech-heavy (IPSMX)IPS Millennium fund. "They're just a big, old slow company with no Internet gear."

It will be intriguing to see if the stock proves Landis right. While his record could easily be taken as an endorsement, the overwhelming lack of interest among other pros makes an equally strong statement.

"He's had a good track record," says S&P's Edwards. "But every manager is going to be wrong at some point in time -- it's just a matter of when and how big. So this could be his time."

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