Even if you don't own
, chances are you own Qualcomm, thanks to your mutual-fund manager.
Though ill-informed and panicky amateurs are routinely blamed for overheated run-ups, it looks like the pros played a major role in this riches-to-rags story.
Last year, while the maker of technology used in digital wireless communications systems was rocketing to a 2619% return and analysts were claiming Qualcomm to be the next
rolled into one, scores of mutual-fund managers threw valuations to the wind and anted up.
What a difference a year makes. Today, Qualcomm's stock fell 13% on analyst warnings about dimming Asia prospects and Qualcomm's stake in embattled satellite-phone concern
, pushing the stock down 69% since January. Guess who's left holding half the bag.
Mutual funds own 49% of Qualcomm's shares outstanding, according to the latest reports compiled by
. (As a comparison, funds own 13% of Microsoft's shares outstanding.) Fund industry insiders and observers acknowledge many stock-fund managers got swept up in the Qualcomm momentum juggernaut.
The Qualcomm case highlights many of the potential pitfalls that trip up fund managers, not the least of which is the "must-have" mentality. There are some stocks that are seen as such stellar performers that they have become must-haves, giving rise to such money manager mantras as, "You won't get fired for owning GE." Until Microsoft's recent antitrust entanglements, the software titan was in the "no-brainer" club, too. But other stocks attain must-have status based in large part on upward momentum, particularly for growth fund managers fiercely competing for investor dollars. Qualcomm last year was the quintessential example.
"The pressure on funds in the growth area was probably tremendous to own hot telecom names like this one," says Burt Greenwald, a Philadelphia-based fund consultant.
Of the 177 funds that posted triple-digit returns on 1999, nearly one in five owned Qualcomm. Today one in three large-cap growth funds own shares, and 29% of all large-cap funds have a slice of Qualcomm.
"It's one I thought I needed to own," says Michael Gallipo, manager of
Monument Telecommunications, who says he felt like he was late to the party when he started by buying shares in October and late November. Despite the skid, he's still holding on, in part because his stake remains a slim 1% of his portfolio.
But some resisted the temptation, and for a time faced the ire of shareholders.
"We stayed out because of valuations, but we had a lot of shareholders calling up and asking why we didn't hold it," says Adrian Brass, comanager of the
Guinness-Flight Wireless World
fund, which launched Feb. 28.
One money manager offered another explanation for the heavy mutual-fund exposure: window-dressing. This is the fund-manager game of buying winners and dumping losers at the end June and December -- just ahead of mandatory semiannual portfolio reports -- so investors would see a portfolio of well-regarded stocks in portfolios. After the stock posted a 454% percent return in the first half of last year, many funds jumped on board with both feet.
"It's not insignificant that the stock's climax took place at the end of the year," says Don Luskin, portfolio manager of the
. "It was perfect timing for window-dressing."
Thanks in part to a sky-high price target from a
analyst, the stock shot up 50% in the last two weeks of the year.
Now, as the first-half of 2000 approaches, we might be seeing the opposite of a feeding frenzy from portfolio managers. Of the 10 funds Morningstar lists as having the biggest percentage of their net assets invested in Qualcomm, a closer look at more recent information shows many have reduced their positions in this stock that has little, if any, room to grow.
The $883.9 million
MFS Managed Sectors fund had 10.4% of its assets invested in Qualcomm at year-end, but by March 31 manager Toni Shimura whittled it to 2.3%. Shimura and the firm's other managers were meeting on Cape Cod, Mass., and unavailable for comment, according to MFS spokesman David Oliveri.
Calamos Growth had a 6.8% Qualcomm position at year-end and promptly dumped it completely on Jan. 26, when it appeared the firm couldn't keep trouncing analysts' rosy estimates.
"It was a very large position for our firm, but we got out of the stock because of the negativity and analyst's downgrades," says John Calamos, Jr.
Even Luskin, who gushes over the stock, has cut down his Qualcomm stake from around 4% at its peak last year to 1.2% today. He says analysts' estimates left no room for error, essentially setting the firm up to fail.
"What you're seeing today is what happens when bad analysts happen to good stocks," he says.
Fund managers say they're generally bullish on the company's prospects, but few say they're stepping up to the plate to buy its still pricey shares now. Translation: Look out below, because the stock is still far from cheap.
"There's a whole class of tech and wireless stocks whose valuations were absurd and now they've only fallen to ridiculous," says Syl Marquardt, director of research
John Hancock Funds
If you're wondering if mutual funds sellers aren't moving the stock down, talk to Jeff Provence, comanager of the
"Fundamentally the company is fabulous and long term it's a great company to hold," he says. Despite the glowing review, Provence notes that the fund dropped its Qualcomm weighting to 0.75% from 4% in the last week of May. "It worked out real well."
If he likes the company so much, why isn't he charging in to buy now?
"I think a lot of institutions will reduce their positions and that will put a lot of pressure on the stock," he says.
Keep that in mind next time you see a can't-miss stock tumble and someone blames it on day-traders and E*Trading grandmothers.