10 Questions With Firsthand's Kevin Landis

Kevin Landis' Firsthand Technology Value fund has rung up sizzling returns in its day. But now he likens the tech sector's collapse to a forest fire.

Talking With: Kevin Landis

Fund: (TVFQX)Firsthand Technology Value

Assets: $2 billion

Managed Since: March 20, 1994 (inception

1-Year Return: - 49.8%/Beats 55% of Peers

5-Year Return: 20.5%/Beats 80% of Peers

Expenses: No-Load/1.91% Annual Expenses

Top-Three Holdings: PeopleSoft(PSFT) Cabletron Systems(CS) Legato Systems(LGTO)

Source: Morningstar.

He should know. His flagship Tech Value fund is down almost 50% over the past year and that actually beats his average peer, according to Chicago fund tracker Morningstar. Based in Silicon Valley, Landis and his fund shop became the poster children of tech's mind-boggling run in the second half of the 1990s. Consequently, he has taken some heat as the sector has crumbled.

That said, Landis still beats his average peer over the past one, three and five years. In 1999's froth, the Tech Value fund rang up a 190% gain that beat 88% of competitors; in a bleak 2000, his 10% loss trounced a cool 96% of peers. Above-average gains with below-average risk is a portfolio manager's goal, and Landis has delivered.

So where is he investing his shareholders' money today and when does he think tech will turn around? Read on.

1. What's the case for investing in technology today?

Landis: The analogy I'm thinking of regarding the tech sector is a forest fire. The big trees look charred but they're still alive -- that equates to the big companies that have staying power, like an Oracle(ORCL) or a Siebel(SBEL) or a BEA Systems(BEAS).

After the fire sweeps through, there are new plants that grow up. The fire clears it out and lets light and nutrients in and you can get new growth.

I would argue that if you looked at the networking sector, we've got companies like Lucent(LU) and Nortel(NT) which may not ever recover.

There may only be one real tall tree (it's named Cisco(CSCO)) that actually survives this.

Who are the other tall trees going to be? There's no perfect candidate among the saplings out there. With each of them, you can make a case that they're missing quite a lot. But if you look at Juniper Networks(JNPR) or Extreme Networks(EXTR), they look like strong companies. Ciena(CIEN) looks like a very strong company, too.

Beating a Battered Pack Tech funds have been thumped, but Landis is faring better than most

Source: Morningstar

Technology is a growth sector that hasn't been growing, so a lot of the growth multiples have been taken out of these stocks. But you've got to believe that technology is going to be synonymous with growth once again, or you don't invest.

2. What companies are you investing in today?

Landis: Well, you can create a basket of the networking equivalent of Intel(INTC) by throwing Broadcom(BRCM), PMC-Sierra(PMCS), Applied Micro Circuits(AMCC) and Vitesse(VTSS) into a single basket. And in the immediate term, that's going to expose you to one of the most severe slowdowns that any tech sector has ever seen. You're going to be buying stocks that are 80% to 90% off their 52-week high, and still might look expensive off of the current numbers.

But what it will do is it will give you a very good shot at owning the industry powerhouses for the next five years in connectivity devices.

3. On the flip side, what tech companies are you avoiding right now?

Landis: Well, we've felt the greatest amount of pain within the [business-to-business] software names.

You can make the argument -- and I do -- that we've only just scratched the surface of what business can do with the Internet. E-commerce is really all about what Fortune 500 companies do with the Internet. It's not about eToys, it's about target.com and walmart.com.

But like a lot of technology trends, this one will be bigger than people had hoped early on -- but it will take much, much longer to play out, as the big changes often do.

Even though you're shying away from the B2B darlings, you might still be buying very solid enterprise-software stocks that have an e-commerce component. Names like Oracle, Siebel, BEA, then supply-chain management firms like i2 Technologies(ITWO). But all of those names have been, to varying degrees, excruciating to hold through the first six months of this year.

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4. When do you think things turn around for tech companies?

Landis: Is this going to be published before or after Cisco's call next Tuesday?

Before.

Landis: [Laughs] You know, Cisco could surprise us and be sufficiently upbeat on Tuesday and get us going. We're starting to see mixed signals out of the market. We still hear a little bit more negative than positive, but it's not uniformly negative any longer.

Is the light at the end of the tunnel an oncoming train? Probably not. We've pushed the recovery talk to the first half of next year. But in terms of the stocks recovering, some people are carefully saying that they think they may see it coming. [Laughs.]

I hate to say any quarter now, but it's any quarter now.

5. Mind playing a little word association? I'll name a company, and you say if you own shares in any of the funds you run and what your outlook is. First, Microsoft(MSFT).

Landis: I'd have to say Microsoft is a rock.

Do you own it in any of the funds?

Landis: We don't.

Microsoft looked like a company that had so much success and had grown so much that its prospects for growing at a decent rate just didn't look that good. It looked like there wasn't enough growth there to get excited about. Of course, in the middle of an upheaval what you want is stability. I think that's why the stock's been so popular lately.

Cisco.

Landis: Survivor.

That's in the Tech Value fund?

Landis: Yeah. This is its second appearance in that fund. The fund buys undiscovered or unloved stocks, and so the only other time we bought it was in the summer of 1996. The Tech Value fund only buys Cisco during market crashes.

EMC(EMC).

Landis: Maybe the word is franchise. We own some EMC in Tech Leaders.

The Perfect Storm Firsthand's fund lineup has been in the eye of the tech tempest
Firsthand Fund	1-Year Return	3-Year Return
Technology Value	-49.8%	26.1%
Technology Leaders	-51.5	20.2
Technology Innovators	-56.7	28.8
Communications	-71.3	N/A
e-Commerce	-73.2	N/A
Avg. Tech fund	-52.0	12.1
Source: Morningstar. Returns through Aug. 2.

The best thing you can say about the data-storage market is it's managing bigger and bigger volumes of information. That's still a great trend to be on. But, you know, the flip side of that is that Cisco's got to go someplace for growth. If they're successful in reaching in that direction, then Cisco could make those stocks a lot less desirable.

Lucent.

Landis: Oy. You know, I'm afraid that the word for Lucent is death spiral.

Before everybody that still works for Lucent sends me an email, let me just say that that's what it looks like they're in right now. There was a time when IBM(IBM) looked like they were in a death spiral and they pulled out of it.

JDS Uniphase(JDSU).

Landis: A couple years ago ... people began referring to them as the Intel of photonics. They could still be that. The rate of innovation in fiber-optic components is, I expect, going to be very high over the next decade.

The way you manufacture those components, and the level of integration for those components is still very primitive, so they've got a long road to go. That said, there are many possibilities along that road.

I would say the one word for them is opportunity.

6. What are your thoughts on telecom? Some value investors like Bill Miller think it's oversold.

Landis: Data traffic, and Internet traffic specifically, continues to grow at a healthy pace. Even in the middle of a recession, even with a lot of the companies involved suddenly exiting the picture, it still grows.

The end demand is there. The health of the service providers is the big issue and I think we're going to see a consolidation. Step one is the shakeout that's occurring. Step two is fixing the business models so that the survivors can realize positive cash flow.

7. What do you think of wireless -- both handsets and wireless infrastructure?

Landis: If you're looking at wireless infrastructure, the demise of [bankrupt local phone service provider] WinStar was brutal for a lot of the fixed wireless companies -- it hit them right in the solar plexus.

It's such a practical technology that surviving companies should embrace it. It's a business that's not going to go away and I think that they've felt most of the pain that they're going to feel.

On the handset side, it's not a monolith. If you're looking at the European handset market, if you're looking at Nokia(NOK), things don't look great.

But if you're looking at the U.S. market, looking at this Christmas season that we're heading into, sales of phones in the U.S. could see some decent growth this year.

8. Have you noticed flows to the funds dipping significantly over the past year?

Landis: Our investors have, by and large, been very disciplined and stuck with us. We've been encouraged by how light the outflows have been. It's really just on the order of maybe a percent or two.

But for an historical context, if you look at November 1997, or October of 1998, the real bottoms there -- I guess October of 1998 Newsweek had the Crash of 1998 on their cover, they had a black cover on the magazine, that was the bottom. It was the perfect buy signal. Inflows were just nonexistent then.

That's the best evidence that people are just not naturally good market timers. The absence of inflows at the market bottom. And we're near the market bottom.

9. The last time we talked we were talking about what were the three companies you had the most confidence in for the next five years. The three that you mentioned were PMC-Sierra, AMCC and BEA Systems. Any adjustments? Or is your team on the floor?

Landis: I think that's a good team. By the way, you said five years -- it's been less than five years, right?

10. Indeed. So, care to be the latest to call a bottom for tech stocks?

Landis: We're in a recession, we don't know how long it's going to last -- nobody knows how long it's going to last.

Most of the people who have tried to call the bottom so far have demonstrated that smart people still have a hard time calling the bottom. The Cisco call is the next thing that could be it and could signal the turn, but that doesn't mean that it will.

We'll just have to see. We know at some point something's going to change it. Even then, it won't be obvious until we have a couple months' distance and then we can look back and say, yeah, that was the bottom.

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