Witness: A pro tech investor who's bullish on the fourth quarter -- sort of.
Q4: Boom or Bust?
Every day this week, TheStreet.com chats with
a top money manager to hear
his forecast for how this volatile year is going to end.
The lineup: |
Monday: Kurt Schansinger,
manager of the Merrill Lynch Balanced Capital Fund |
Tuesday: Paul Meeks,
skipper of Merrill Lynch Internet Strategies and Merrill Lynch Global Technology |
Wednesday: John Maack,
director of equities at Crabbe Huson |
Thursday: John Bollinger
of Bollinger Capital Management and EquityTrader.com |
Friday: Kevin Landis
of Firsthand Funds |
Weekend: Bob Turner
of Turner Funds |
Paul Meeks, who manages more than $6 billion in assets between the
(MAGTX)Merrill Lynch Global Technology fund and the
(MANTX)Merrill Lynch Internet Strategies fund, doesn't buy all of the negative hype surrounding tech stocks heading into the fourth quarter.
Even with the tech-laden
Nasdaq 100 down almost 13% in September, a sagging euro and earnings warnings from big tech shops like
Intel(INTC) and
Apple Computer(AAPL), he thinks there are plenty of others that will sail through the fourth quarter, including optical networkers and some of the biggest Net companies. Yes, he does name names.
Meeks admits it's not all blue skies. He sees at least a couple of ways to lose money in tech stocks between now and Dec. 31, and he warns investors not to bother investing until after this week, for instance, because more earnings warnings will come, and they'll weigh on the whole sector.
He also cautions tech fans about gobbling up shares of beaten-up big-caps like Intel,
Dell(DELL) and
Microsoft(MSFT), because these bellwethers aren't necessarily bargains or must-owns anymore.
McDonald: What do you see happening in the broader tech sector in the fourth quarter?
Meeks: I'll go against the tide from all the stuff I've been reading. Once we get past the preannouncements -- nobody announces bad news on a Friday, so I hope we're done this Thursday afternoon, but we may have some more dribs going in to the second trading week of October. You're going from a preponderance of lousy news to companies that are announcing that they're making the numbers.
There are some stocks that I follow that are going to give great quarterly updates and pretty robust forecasts for both the December quarter and for calendar 2001. After mid-October, we're going to have a nice run through the seasonally strong period for technology, which extends through about mid-March.
I'm pretty encouraged about how we're going to end this calendar year.
McDonald: We have some challenging variables on the radar -- the flailing euro, these preannouncements and so on. What's your take on the tech bellwether stocks such as Microsoft, Intel,
Cisco(CSCO) and Dell?
Meeks: One of the reasons our portfolio has been light on PCs for some time -- and this covers three of your bellwethers, Microsoft, Intel and Dell, which have been the best tech investments for the past decade or more -- is that the growth rate for PC units worldwide doesn't interest me anymore. I don't think it's going to go to zero, like [Oracle CEO] Larry Ellison says.
But looking forward three to five years, I don't think you can make a forecast for PC growth much higher than the very low-teens. That might be great if you're an analyst that covers
Caterpillar tractors, but in technology there are so may better opportunities.
To answer your question, I don't think Intel, Dell or Microsoft are great opportunities. You might get a dead cat bounce in some of these stocks. But long term, would I want to own those stocks to the same relative position in my portfolio as they occupied in the '80s and '90s? I don't think so.
With Microsoft, a lot of people ask me about the
Department of Justice. I think that's the least of their problems. There's no possible way they can have the kind of stranglehold in the Internet world that they had in the desktop operating systems world, because they've shown no success so far.
McDonald: What is the biggest mistake a tech investor can make this quarter?
Meeks: Let me give you a couple. One is jumping in and investing before we get through these preannouncements, because they're taking all these stocks down, and I'm not foolish enough to think Apple is the last one. Another mistake is that, sometimes when stocks get crushed, it's tempting to go with the value bet.
So, Intel, Dell and Microsoft, for example, might look tempting because they are at the low end of their range, but I've found over the years that value investing does not work in technology.
For example,
Ariba(ARBA) vs.
Commerce One(CMRC) -- two companies that do the same thing, but one company's the gorilla and the other company is a value-discrepancy thing. People will say, "Can't we get the cheaper one?"
Usually, the strong get stronger in technology and, believe it or not, you want to pay up. You don't want to be sucked in these bear traps -- Intel, for example, could very much be a bear trap. It isn't the company it used to be.
This doesn't mean you have to be an aggressive momentum guy who doesn't care about fundamentals because value investing doesn't work in technology, you need to be somewhere in between.
McDonald: Last year, fourth quarter was an all-out party --
Meeks: Which ran all the way through March 10, the Nasdaq peak.
McDonald: Right. How do you compare Q4 '99 with Q4 2000?
Meeks: The similarities I see is that, once we get through the preannouncements, we'll have a nice seasonal bounce in which tech will blow away the
Dow Jones Industrial Average and the
S&P 500. However, last year, you saw that the dot-coms, in particular, did 100%-plus returns. The cat's out of that bag.
Some dot-coms, particularly
AOL(AOL), have shown some stabilization. A couple stocks will have a nice seasonal bounce, whether we're discussing Internet stocks or core tech stocks. ...
McDonald: Are we talking about companies such as
Amazon.com(AMZN) that may be tied to e-commerce performance over the Christmas season?
Meeks: Yes, I do expect a pretty hot e-commerce selling season. But the fact that these stocks have been exploited and the fundamentals revealed for what they really are means I don't think people are interested any more. These companies have not shown the path to profitability, as epitomized by Amazon.
So, we'll have the seasonal outperformance by technology, Internet and otherwise, from Oct. 15 through March 15. But you're not going to have the magnitude we had last year; you're not going to see triple-digit returns all of a sudden after the preannouncement season ends.
McDonald: Lastly, any sectors you think investors should be wary of, or enthusiastic about?
Meeks: I'd caution the retail investor to be PC-wary. That's not just PC vendors, but also the semiconductor vendors and the software vendors that sell to the box.
But there are certain parts of technology we like very much. We very much like contract manufacturing, telecom-equipment -- that means optical only, not legacy. And we like a handful of Internet leaders like AOL and TMP Worldwide -- those that will be the 20% that will survive and get stronger.
McDonald: Can you name a few companies within these sectors that you like?
Meeks: In contract manufacturing, we like
Flextronics(FLEX). That's one of the biggest holding in the global tech fund.
We also own
Celestica(CLS),
Jabil(JBL),
Sanmina(symbol) and
Solectron(SLR).
We've owned the first four for a long time, but we only got into Solectron a week or so ago after the conference call once we thought the bad news was out of the way.
In telecom equipment, we're focused solely on optical. Between optical components and networking, we own
Corning(GLW),
JDS Uniphase(JDSU),
SDL(SDLI),
Ciena(CIEN) and
Nortel Networks(NT).
We're heavy those, light the legacy telecom equipment guys, the guys that sold the old equipment that is going away. Companies like Lucent, unfortunately, we have been in that stock for a while.
Tellabs(TLAB), which is struggling to go from legacy gear to optical gear.
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