10 Things You Need to Know: Weighing and Measuring the Contenders to Be the Next Microsoft

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Bellwethers or bubbles? That's the question that tech investors face as they try to figure out which stocks will lead the market through the next millennium or so.

The hunt is on to find the new bellwethers, the top companies in expanding parts of the economy. These are the stocks that epitomize colossal economic trends: companies such as Microsoft (MSFT), embodying the rise of desktop software; Intel (INTC), the rise of the chip; and Cisco (CSCO), the growth of the Internet and its emergence as a sales channel.

With the recent run-up in so many tech stocks, the market is rife with possibilities. Choosing one with staying power poses many challenges, though: Buyers must decide which companies will deliver the consistent earnings and revenue growth that investors demand, as the likes of Microsoft, Intel, Cisco and Dell (DELL) have. Yet many of 1999's favorites lack even significant revenue, let alone earnings.

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And ironically enough, stocks that have turned in astounding one-year performances -- as many did in 1999, the year of the Nasdaq's 86% gain -- are probably burdened by their success in an era of rising investor expectations. After a stock appreciates, say, 2,619% in a single year, as Qualcomm (QCOM) did, how much upside can be left? Will investors desert the stock if its growth settles to perhaps 50% annually (a bar that Microsoft has cleared each year since 1994)?

For tech-watchers, then, the idea for the most part is to find the industry, then find the right company to lead that industry. "You identify an important theme that's going to develop over the next five, 10 years," says Fritz Linkner, a research analyst at Husic Capital Management, "and you pick a company that can lead the theme."

Virtuous Cycle

One of those themes, Linkner says, is what he calls compressing the cash-conversion cycle. That means using the Internet and related efficiencies to shorten, or eliminate, the delay between the moment a company sends money out the door to pay for supplies, and the moment it collects money from customers for its finished products. Now that Dell and Cisco have pioneered this process, the bellwethers in this trend are the companies that help others shorten this cycle, he says: companies such as Commerce One (CMRC) and Ariba (ARBA).

Another important trend, says Linkner, is the transformation of unused fiber-optic cable in the ground into intelligent networks. That leads to a pair of stocks that Linkner calls the leaders in this area: JDS Uniphase (JDSU) (on several professional investors' bellwether lists) and Sycamore Networks (SCMR). Linkner's firm owns stock in all the companies he mentions but Dell.

Nick Moore, a technology investor at money-management firm Jurika & Voyles, agrees that JDS Uniphase is another rising star for the telecom industry. But if you want a company whose results really give you an insight on what's going on in the telecom sector, he suggests Corning (GLW), which, breaking out of its old-fashioned glassware heritage, derives most of its revenue from fiber optics and other telecom products. Moore's firm owns Corning, but not JDS Uniphase.

For Nancy Casey, general partner at investment firm Valhalla Capital, a bellwether company doesn't necessarily predict where the rest of the market will go. Rather, it indicates where the rest of the market should go. Bellwethers deliver high, sustainable growth, she says. They have "extraordinary" leadership, Casey says, which is something more than a good management team. Indicative of the rise of the Internet, likely future bellwethers include Yahoo! (YHOO) and America Online (AOL). Valhalla has a stake in AOL.

Soft Serve

John Puricelli, technology analyst with A.G. Edwards, suggests software companies such as Oracle (ORCL), BMC Software (BMCS), Symantec (SYMC) and Citrix (CTXS). "These guys will survive in the e-world and the non-e-world," he says, "And companies will continue to buy their products because they have to." A.G. Edwards doesn't have any underwriting relationships with these companies; Puricelli has an accumulate rating on Oracle and a buy, his firm's highest rating, on the others.

Cern Basher, vice president at Provident Investment Advisors, says a bellwether has to be big enough to place bets on several different developing technologies and not just rely on a single product. Riding the Internet to likely bellwether status are America Online and Exodus Communications (EXDS). Reflecting the rise of wireless communications are Nokia (NOK) and Qualcomm. And a possible successor to Intel is Texas Instruments (TXN), he says. (Basher's firm owns shares in all of these companies except for Qualcomm.)

But Basher cautions against assuming the bellwether label is any more permanent than a Post-It note. "We might grow to love certain companies, but things change," he says. "Investing is all about making money. It's not a popularity contest."

Read them all 10 Things You Need to Know to Profit in 2000 Monday, Jan. 3 For Wide Spreads and Cheap Stocks, Investors Can Join the Latin Club Wireless Internet Stocks -- Understanding the Monster Tuesday, Jan. 4 Intel Hopes the Itanium Will Be a Chip Off the Old Block Exchange-Traded Indices Pose Threat to Mutual Funds Wednesday, Jan. 5 Technology Buildout Goes Global B2B Becomes the BFD Thursday, Jan. 6 PC, R.I.P.: The New Kids Are in Town Broadband's Benefits Cut Wide Swath for Net Outfits Friday, Jan. 7 Declining Profit Margins Will Span Old Wall Street and New Weighing and Measuring the Contenders to Be the Next Microsoft

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