Kevin Landis doesn't believe in market seasonality. But that's not to say he doesn't like what he sees for technology stocks in the fourth quarter.
Q4: Boom or Bust?
John Maack ,
Friday: Kevin Landis
Weekend: Bob Turner
Landis spoke with George Mannes as part of
"Q4: Boom or Bust," a special package of Q&A sessions with top money managers on how this choppy year is going to end. The skipper of several
funds -- including
Technology Value, the nation's top fund over the past five years -- worries a bit about the wild cards of investor psychology and consumer behavior on fourth-quarter performance.
That said, Landis stresses that it's best to look at technology investing with a long-term horizon. With that in mind, he likes outfits such as
What do you see happening in the market during the fourth quarter?
The question about what the market is going to do in Q4 is driven by two things: news and information flow in the fourth quarter, and market psychology.
Now, those are not the primary things that we tend to look at. We're busy asking ourselves, "Three and four years from now, which stocks will people be kicking themselves over?"
Investors are fairly ambivalent about tech stocks. They're afraid of being left out of the great growth sector of the economy, but they're also afraid of paying too much for a good story, or owning companies in which they really don't have a strong understanding. And there's always the fear that some competitor will leapfrog them. So you tend to get some pretty pronounced mood swings around technology stocks.
So if I think of sort of a mood swing pendulum, I can ask myself, where
the pendulum? It's definitely more toward caution and a fear of owning them than it is toward fear of being left out. But if it's hard to make that call psychologically, it's much harder to say, "Well, what's the momentum in the pendulum?" I think that depends a lot on the information flow.
Now we're heading into earnings season, and we've had a lot of confessions in the past couple of weeks, but I think there is still room for good tech companies to really blast out their numbers.
I think the whole issue of
telecommunications carrier spending is an easy one to get yourself worked up about. And unfortunately, it undercuts confidence in some of the best stories right now. If you think it all the way through, a lower capital expenditure for companies like
can get you less excited about even as strong a franchise as
. So if there was one piece of news flow that I would love to see, it's aggressive capital spending on the part of the carriers, which of course would have to be presaged by stronger operating results so that they're more credit-worthy and the capital markets will throw more money at them.
How optimistic are you that the carriers are going to meet their numbers, and that they are going to make this happen?
The carriers still have the basic problem that most of their traffic is data and most of their revenue is voice. That's going to be a problem for a while. Now, some companies really are going to have a hard time working it through, and that's companies like
. Other companies aren't quite so heavily dependent on the voice. But you know, it's the same basic issue for everybody, which is you've got to get more data services revenue on line, and you have to show that you're profitable.
If AT&T's at one end of the spectrum, who's at the other?
Hard to say. I don't think there's any one carrier that stands out as being just in a hands-down better position than all the others. They're all kind of in the same limbo.
Are you expecting any more negative preannouncements?
The cynic in me sort of expects it.
almost gave me a heart attack by faxing me notice of a conference call before the market opened
Wednesday morning. But it turns out they were just buying another company. (Laughs.) I'm just pondering what would have happened if they preannounced. Oh, my goodness!
I think we're mostly done with it. But you never know.
preannouncement, how do you look at the semiconductor market and the computer market right now?
I can give you a sort of a geeky, tongue-in-cheek answer, which is that the chip industry is not monolithic. Companies that make the right kind of chips, addressing the proper end markets, are going to do very well, regardless of the SIA book-to-bill ratio. And companies that have their products geared toward markets with slowing growth, they're going to have trouble. And you know, Intel's bread and butter is the PC business, and it's just not that exciting anymore. There's a lot of revenue there. It's a terrific cash cow for them. But in terms of percentage growth rates, I think the most exciting times are behind them. Not in terms of the technology, necessarily, but percentage growth rates.
For which companies are there exciting times still ahead?
Well, you can't go wrong with the communications integrated circuit companies -- very strong stories. The only place where you can go wrong there, I think, is paying too much, and even then you can argue that the market caps there are not outlandish. We own PMC-Sierra, we own
. We own Vitesse, we own
, we own
, we own
As you look forward toward the rest of the year, what worries you the most?
The long-term trends don't really worry me at all. I feel they're very solid. I think the company selection is fine; we own the right stocks around the powerful trends. I sometimes worry about market psychology, but I have the feeling -- and this is just feeling -- that there's a lot of fear priced into the stocks right now, so that makes me feel comfortable.
I guess the wild card that you'll never really get away from is consumer behavior -- the rate at which people adopt technology. Think of the
Pilot and compare it to the
Newton. It's sometimes a pretty ticklish exercise in figuring out when people are going to embrace a certain technology. You could always get maybe a flattening out of the adoption curve. It could happen at any time. I don't see it happening, but you never know. If Internet traffic would grow more slowly, that would shake up a lot of people, and it would take the luster off the communications infrastructure. Or if cap spending, capex
capital expenditures were to fall precipitously with the carriers, if there were sort of a balance sheet crisis with the carriers, that could make me worry. But I don't see those things as very likely.
There's a perception that fourth quarters are good for tech stocks. Is that true?
I'm very skeptical about stock market seasonality. If everyone believes that Q4 is always great, then what would have happened was we would have had a blowout September as everyone tried to get in ahead of it. And guess what? We didn't really have that.
Now, having said that, we're actually in a position to have a really great fourth quarter. People never seem to get in at the bottom. Maybe the fact that people aren't piling into the market right now is the real sign of an upturn. (Laughs)
Any final thoughts?
Let me make a point: We're talking about technology investing, and we're talking about what to expect in the fourth quarter. If you're invested in tech, your best protection from the volatility of tech is to have a longer time horizon.
People complain about the volatility of tech stocks, and they think that that means that they're risky. Volatility is absolutely synonymous with risk if you're looking at short time horizons. But the riskiness of volatility evaporates if you stretch out your holding period. And I really think if you're invested in tech you ought to be looking at where you think these things are going to be priced at the end of '02 and '03.
For more on Landis's views of the market, check out
Streetside Chat from Aug. 19.