Tech companies' fates are determined by a few geeks who draft tech budgets at big companies. Bill Schaff talks to those geeks. That's why you want to talk to Bill Schaff.
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In picking stocks for the
Berger Information Technology fund, Schaff follows one directive: Follow the money. A former engineer, he regularly talks to tech buyers at
100 companies, investing his shareholders' money in areas with the most corporate tech projects and in companies that are winning the most business.
Schaff's approach might sound simple, but it has led to solid gains. Sure, he's taken his licks during the past year like most of his peers, but he has also beaten his average competitor in each of the past three calendar years, according to Chicago fund tracker Morningstar. Unlike most tech specialists, Schaff isn't a cheerleader. He thinks the tech sector's recent rally is bunk because corporate tech budgets aren't going to grow until late next year. What's he buying? What's he avoiding? And when will companies open their wallets again? Read on.
1. Has corporate tech spending bottomed or started to rise?
I don't think it has bottomed, and that's what has me scratching my head at the recent rally. The market's doing whatever it's doing, and nothing I say is going to change that, but corporations are still belt-tightening according to everything I've seen and heard. They're pushing off everything to 2002 and further as they make their budgets.
A lot of salespeople are getting creative, saying, "We can start implementing projects now, but we won't bill you until 2002." So things are getting done, but the budgets themselves, on an absolute basis, are still down quite a bit. I just don't see that changing unless the economy picks up strongly, and I don't see that happening right now. Companies sure as hell are not going to give
their tech buyers any more money until they do see a pickup.
2. When do you see tech budgets rising?
Definitely the latter part of 2002 and into 2003. People in the know seem to be saying the same things regardless of what they're saying in public. What they're saying in public gets people excited, but what they're doing is different. They're moving very slowly and very deliberately.
talking about the three-year cycle where there's renewed buying in PCs, but everybody I talk to is talking about a four-year cycle.
3. So what's the explanation for tech's recent rally?
I think that a lot of it is just sentiment -- people wanting to see something that isn't really there. I can only make decisions on what is. I focus my money, come hell or high water, where the money's going to be spent.
4. Where are companies spending money?
Outsourcing continues to be a major trend. Anything that continues to improve cost-cutting efforts is still going to get done eventually. We've seen that with the major players like
. They're all picking up major outsourcing contracts.
Those are companies you're buying now?
That's all I'm buying. And very little else.
5. On the flip side, what is the last tech area where companies will spend money?
Anything discretionary. They're certainly not going to be doing anything innovative, well, hugely innovative, at this point. So I think for a lot of companies that make Web-based applications, unless there's a real need for it, there just isn't going to be a whole lot of extra money. I think that's one of the reasons
has been having a lot of problems, even though you'd think supply-chain management would be a very big cost-saving measure.
Things aren't great for B2B
business-to-business companies, but they've rallied the most. I understand they were beaten down the most, so they're bouncing off a much lower base, but nonetheless, they still aren't at levels they probably should be. A lot of these companies who aren't profitable are really struggling to make ends meet.
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Source: Morningstar.Returns through Nov. 16.
I own Microsoft in the fund, and I think it's going to do well. Their operating platform is extremely well-positioned, and they've got the ability to survive.
I think it will be a survivor. I think it's fairly priced at $14. I own a position in the fund, what I consider to be a standard position of 0.5%. At this price level, that's about all I'll own.
I have a small Cisco position in the fund, and I think they're way ahead of themselves right now in terms of valuation. It's funny, people will start focusing back on their enterprise business. That's where they came from, and it's the market they dominate. What's killing them is the telecom space, and that's not going to recover for a while.
I'm not a fan of either, and I don't own them in the fund. If I'm going to own anything in this area, it's Cisco. And since I don't own a lot of Cisco, that tells you my sentiment on the group. The one exception is
How about a giant you've been buying, IBM?
IBM is sort of like Microsoft. It's a bellwether for the corporate market, and it's done extremely well in diversifying its business. I think it's extremely well-positioned to continue to compound well into the future. Its business model probably drives it. And when people talk about outsourcing solutions, IBM is the epitome of that.
7. If corporate tech spending comes back in late 2002, when do tech-stock prices begin to reflect that?
The rule of thumb is stocks rise six months earlier. My guess is we'll have a selloff at the beginning of the year and we'll have a rally toward the middle of the year when things really do bottom out on a fundamental basis.
8. Thanks to falling earnings, many tech stocks are still trading at high valuations. Do you see a scenario where things get significantly worse before they get better?
Everyone talks about the U.S. economy sliding down like the Japanese economy, where they keep talking about a recovery that never seems to come. I don't think it's the same, not by a long shot. However, business fundamentals don't just turn around on a dime. When the guys in corporations start telling me they have more money in their pockets to spend, things get better. They're not telling me that, and until they do, I think things for the companies in this area won't get much better.
9. What are a couple of companies that stand out as being very overvalued after tech's bounce?
Where should I start? I think a lot of B2B businesses have just gotten way out of hand. I still think
is way too expensive.
has come down pretty hard, but I still think they could come down harder. I love
Internet Security Systems
, but it has had a huge run and they're still not making any money. I think there's something wrong with that.
has come down hard, but not hard enough in my mind. And now Dell has had a huge run, and I don't see why. That's a commoditized business; even if they're the best in it, it's still a commoditized business.
10. Every tech investor is looking for companies with solid products, any predictable growth, good management and a reasonable valuation. What are two or three companies that you think fit thatprofile?
is a great core holding. I think IBM is a great core holding. I also think
SunGard Data Systems
is one of the cheaper values relative to its growth prospects. I think
is a very good value. In terms of chip companies, I don't own many, but I don't understand how you get any type of economic recovery without
being exposed to it. I think the landscape can be fairly simple and straightforward, but it's the people who are trying to guess who are going to get killed. They're just gambling and losing.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
firstname.lastname@example.org, but he cannot give specific financial advice.