Dear Dagen: Be Wary of Money Managers' Favorite Picks

Fund manager Kevin Landis has a phenomenal track record, but you wouldn't know it from a couple of his recent, very public stock recommendations.

Two bad picks don't necessarily tarnish Landis' excellent reputation. And, of course, the stocks could recover. But these meltdowns illustrate an important point for investors: Don't blindly buy the stocks your favorite manager recommends.

Share your investing and mutual fund questions on the Dear Dagen board Landis' $1.8 billion (TVFQX Quote)Firsthand Technology Value is the top mutual fund for the five-year period ended Dec. 31 with an average annual return of 58.2%. Last year, the fund was up an astonishing 190%.

Still, the guy can goof.

In a Dec. 20 Fortune article titled "What the Best Are Buying Now," Landis names Genesis Microchip (GNSS Quote) as one of his five favorite stocks. Of the Ontario-based maker of integrated circuits, Landis was quoted as saying, "One of the only three pure plays on flat-panel displays. They'll go through the roof."

Instead, this stock fell through the floor.

In early January, Genesis Microchip disclosed that expected revenue for its fiscal third quarter ended Dec. 31 would fall 39% from the previous quarter, while earnings per share would drop to break-even from 20 cents per share. (The company later reported earnings per share of 1 cent.)

The company blamed lower demand for some of its products and a September earthquake in Taiwan for the shortfall.

The announcement knocked the fire out of the stock. Since the end of the year, it's down 12.4%.

(In fairness, three of Landis' other four picks from the Fortune article, TranSwitch (TXCC Quote), Nokia (NOK Quote) and Globix (GBIX Quote), have climbed handsomely. But AT&T (T Quote) is down since mid-December.)

Then came Legato Systems (LGTO Quote).

Landis christened this stock as his "One Stock to Own in 2000" in early January in Brenda Buttner's Under the Hood column.

On Jan. 19, the Palo Alto, Calif.-based developer of data backup and recovery software announced it had failed to meet fourth-quarter earnings projections and was changing its accounting practices.

The stock's down more than 50% since mid-January.

Firsthand spokesman Steven Witt says Genesis Microchip and Legato are still in the Technology Value fund and that any judgment of either of these calls is premature.

"None of what has happened has changed our approach or our holdings," says Witt. "We're fortunate to be in a case where stocks that we like are on sale."

In fact, Firsthand Technology Value has weathered these two setbacks nicely.

The fund is still up 6.8% for the year through the end of January, outpacing 99% of its peers, according to Morningstar.

However, Landis has a few sources of protection that the average investor does not.

For one, he's got $1.8 billion to spread around, diffusing the impact of one or two positions. At the end of November, Genesis Microchip only represented 0.2% of the portfolio, while Legato commanded a slight 0.3% of the fund's assets.

As Technology Value has taken in more assets, the number of stocks has also increased. Now the fund owns about 75 names, while earlier in its life it usually held between 40 and 50.

Because so much new money from investors is pouring in, close to 20% of the fund is in cash, which offers even more protection.

Investors who are thinking about buying the recommendations of a favored manager should constantly remind themselves they probably don't have this kind of downside protection. And this mimicry is particularly dangerous in the realm of tech.

Millions and Millions for Merrill

Two weeks ago, I wrote about two new HOLDRs securities that Merrill Lynch (MER Quote) was planning to launch: Telecom HOLDRs (TTH:Amex) and Pharmaceutical HOLDRs (PPH:Amex).

Well, they're here.

These 20-stock baskets started trading on the American Stock Exchange today.

On Monday, Merrill Lynch priced these two new HOLDRs securities, raising a combined $1.5 billion.

Approximately $900 million was raised in Telecom HOLDRs and about $640 million in the Pharmaceutical HOLDRs. They joined a lineup that includes Internet HOLDRs (HHH Quote) and Biotech HOLDRs (BBH Quote)

With HOLDRs pulling in billions of dollars, don't expect Merrill to stop at four.

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