Asking Bob Turner what he knows about tech stocks is like asking eskimos what they know about snow. So when Turner's fourth-quarter forecast calls for blue skies, it gives investors something to cheer about.
Q4: Boom or Bust?
John Maack ,
Weekend: Bob Turner
Turner Technology fund is up some 120% over the last 12 months, beating nearly every tech fund out there. His new
Turner B2B E-Commerce
fund was the top tech fund in the shaky third quarter. He shared his thoughts on the fourth quarter as part of
"Q4: Boom or Bust?" series, where several top money managers told us what they see coming.
Like several of the tech specialists we talked to, Turner thinks tech companies' earnings will rise and their stock prices will follow suit. Since he's one of those rare tech investors who consistently picks winners and explains the reasoning behind his moves, this final installment in this series is worth a close read.
Where do you see tech stocks going in the fourth quarter?
I have a very favorable impression. Number one, tech stocks have historically performed very well in the fourth quarter. Only once in the last 15 years has technology as a sector substantially underperformed the
in the fourth quarter. So, history is on our side.
More importantly, we believe that the fundamentals are on our side, too. We believe that third-quarter earnings will be fine. We've had the typical preannouncements, including some fairly high-profile ones, most notably
. But we believe Intel's difficulties are Intel and PC-specific. Other segments of the technology marketplace are growing rapidly, which will be reflected in very favorable earnings for the third quarter.
Also, fourth-quarter earnings will be extremely robust based on the typical budget burn by major corporations at year-end.
Do you see the euro's weakness as a major factor during the fourth quarter?
No. We like to segregate between what we call old technology and new technology. Some of the old technology would be
, and at this point, you could throw
, Intel and
into that camp. They serve a segment of technology that's not growing very well, and that's PCs. One would not want to shortchange these companies. They're terrific companies and can probably rebound over time.
On the other hand the emerging technology companies, first of all, don't have a lot of European exposure. Companies like
are not selling a lot of products in Europe at this point. If they are, no amount of slowing within Europe will cause these guys to have their product growth slow. The currency translation won't hurt them.
Given that the fourth quarter is often the time when beaten-down technology companies get a seasonal bump, what do you see happening to some of the Internet companies --
I see a mixed bag. We like AOL, and we think that the likely approval of the AOL deal with
will be a catalyst to move the stock higher.
Currently, we're on the sidelines with Yahoo! and Amazon. There are some issues with Amazon's profitability in the non-books segment of their marketplace. Yahoo! is experiencing slowing advertising.
Probably the most notable tech stock in the fourth quarter is
. Cisco is getting the broad brush that Intel and Microsoft is getting -- that large-cap tech stocks may not do well because of Europe and slowing in general. Our viewpoint is that Cisco is very well-positioned to take advantage of the growth within telecom and enterprise spending, particularly.
While there are some competitive issues with companies such as Juniper and the optical companies, we feel this area continues to grow in general, and Cisco continues to have a higher growth rate than the industry. They had a phenomenal July quarter and we think the October quarter will be just as impressive. They'll continue that momentum through the rest of the year. At current prices of about $58, we just see compelling risk/reward with this stock. At this stage, it's our single largest holding in all of our portfolios.
In surveying the landscape, what are some of the mistakes that tech investors can make in the fourth quarter?
We've always said, at the first sign of earnings concern, sell a stock. That doesn't necessarily mean if they miss on earnings per share. It might mean revenue growth is slowing, margins are under pressure, perhaps one segment of their business may be growing more rapidly than others, maybe receivables increase.
That advice may not be specific to this quarter, but I think it's a great rule of thumb. At that first sign of slowing, head for the sidelines and don't come back until you see signs of improvement. So you see companies like Xerox go from $60 to $11,
go from $80 to $31, Intel go from $75 to $31. And this is even more pronounced in the small- and mid-cap side.
We put out a paper recently called, "Tech Stocks: The Good, the Bad and the Ugly," and our general premise is that 95% of the value is created by 5% of the stocks. Therefore, when people put out this general statement, "Tech is overvalued" or "tech is undervalued," we respond, yes, it's overvalued and undervalued. Perhaps 90% of the stocks probably are overvalued because ultimately their stock price will go down. On the other hand, the 5% to 10% that probably are undervalued will continue to move up and provide terrific returns.
The key is identifying the winners and staying away from the losers.
Who would you say are the strongest contenders in the really intriguing spaces?
The storage area has consolidated among the few winners --
in the large storage device marketplace. Veritas, within software,
with storage area networking.
: Those folks might be well-positioned in any environment because they're less assailable.
: Exactly. I think eventually that group may run into each other, but for now it's pretty clear sailing.
Elsewhere, telecom and optical, JDS Uniphase has established a clear lead with the breadth of their product offerings. Juniper Networks continues to gain share in the routing marketplace. Within the e-commerce software leaders there are
. There are companies with a clear lead. That doesn't mean competitive issues don't arise, they clearly do. But these companies have shown a pattern of innovation that keeps them ahead of the competition.
Any other thoughts?
Well, I would say that we are extremely optimistic. Keep in mind that last year the
bottomed on Oct. 6 at 2548, and basically went up nonstop, doubling to over 5000 -- a 100% move within a 5 1/2-month time frame. We're not calling for a double off the bottom, but we've been in a corrective phase since March and we're poised to move higher.
For more on Turner's views on tech stocks and the market, check out TheStreet.com's
10 Questions from July 24.