Revisiting the 25 Winners for 1999

As promised, Seymour tackles the first two groups of his tech stocks to watch after the first quarter's reports come in.
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In January, I posted here a list of 25 mostly tech stocks to watch for 1999. As I said then, it wasn't intended to be a true portfolio, balanced or otherwise, but rather a useful watchlist of stocks I thought could do well this year. And I promised to revisit the list from time to time during the year.

With the first quarter of 1999 under our belts, it's time for an update. I intended to post this column two weeks ago, nearer the end of the quarter, but complications in my wife's recovery have delayed it. (Thanks to all the

TSC

readers who've written to ask about her condition; she's doing better, if slowly, and I've passed along your good thoughts.)

Inevitably, that delay means this review is informed by a knowledge of what's happened in the three weeks since the end of the quarter, which is in a sense cheating as I look ahead toward the second-quarter performance of the list. But you wouldn't have me do it otherwise, acting as if I didn't know what had happened since then, would you?

Overall, the list was up about 35% at the end of the first quarter. That is, if you'd bought one share of each issue when the column appeared, you'd have made about 35% on your investment in three months. (And through yesterday, the list is up about 45% year to date, including the nastiness and recoveries of this strange week.)

That's a pretty good return. But don't fall into the sucker's play of quadrupling that first-quarter return to extrapolate an annualized 140% return through the end of the year. Sadly, the market doesn't work that way.

Let's go through the stocks in the order they were discussed before, in the same groups: Technology and The Net today, and Bandwidth and Retailing & E-tailing tomorrow.

Technology

This has been a good, but not great quarter to be in tech stocks. Unless you've been in one of the few train wrecks, such as

Compaq

(CPQ)

, down by about half since the first of the year, you've probably done well. But some of the stalwarts haven't done so well.

Dell

(DELL) - Get Report

, for example, was up nicely in early February, but today, postsplit, it is almost exactly where it was when the year began.

There's a lot more, though, to tech than just PC-tech, at least in my book. So when I began my January list,

Cisco

(CSCO) - Get Report

was at the top. Though Cisco's performance so far this year has been ho-hum, it remains a solid investment, I believe, with enormous upside potential over the next few years. I don't see Cisco as a speculative investment anymore, but as a buy-and-hold candidate. As I said in a speech last week, Cisco's become almost a one-stock

Nasdaq

index fund -- its performance so far this year closely tracks that of the Nasdaq -- but with more stability and long-term potential. Still on the list.

Microsoft

(MSFT) - Get Report

was another top tech pick. Despite the trial, Microsoft has moved up about 15% during the first quarter. Tuesday's conference call featuring CFO Greg Maffei was encouraging, as he predicted a fourth-quarter profit of 35 cents a share in the current fiscal year. But I think the continuing distraction of the trial and the possibility -- make that the likelihood -- of pain for Microsoft in the trial court's decision add to existing worries about Y2K buying slowdowns, corporate reluctance to roll out the key Office 2000 upgrade this year and maybe next, and Windows 2000 delivery and adoption-rate confusion. Such factors argue for a flattening of Microsoft's historical rocket-like performance. I'd stay in Microsoft, and it's still on my list, but it won't be huge over the remainder of 1999.

Despite worries in

The New York Times

over the quality of

Lucent's

(LU)

earnings, I believe Lucent, which I am long, is headed for years of strong growth, profits and share-price appreciation. Its rich patent portfolio, buckets of cash, smart acquisitions and strong management keep Lucent on my list. This morning's report of a stellar second quarter, topping the

First Call

consensus earnings number, just confirms Lucent's strength. (It's also likely to be a key player in the about-to-emerge "wireless high-bandwidth Net-access" market; watch for a column on wireless moves soon.)

Dell stays on my list for another quarter, if perhaps only one more. Dell isn't the spectacular growth engine we grew used to in fatter days, and the PC market isn't going to be a great place to be -- or at least, not as great as it once was. I think Dell will put up good numbers, better than most analysts expect, when it reports its current quarter in May. As troubled as the boxmakers are, Dell's going to be the least damaged of the lot. It will this year make strides toward taking over Compaq's post as the largest PC maker. As I said in January, as long as Corporate America keeps buying, Dell is going to do better than any other PC maker.

Merck

(MRK) - Get Report

has been sputtering along with so many other tech mainstays -- yes, I know I'm defining "tech" broadly here, but today the pharmas really

are

technology companies, traditional distinctions notwithstanding. Merck closed Wednesday almost exactly (on a split-adjusted basis) where it was in early January. I still think

Vioxx, Merck's new "super-aspirin," is going to grab significant market share this year. Good news: Tuesday, an FDA panel recommended approval of Vioxx for osteoarthritis and acute short-term pain, as Merck had sought. It's still on my list; look for a modest second quarter and stronger third and fourth quarters.

i2 Technologies

(ITWO)

was on the list and was a bum pick -- or at least, a premature one. Despite turning in its 22nd consecutive quarter of record revenue increases for the first quarter of 1999 -- up 64% quarter-over-quarter from last year -- i2's share price has wobbled since the first of the year and Wednesday closed down about 10% since early January. Smart new deals abound for the Dallas company, which provides enterprise software, in competition with

SAP AG

(SAP) - Get Report

and

Baan

(BAANF)

. One example: A deal with

Ernst & Young

announced this week, under which Ernie and i2 will jointly market i2's business-process optimization software. Still, fears of Y2K spending slowdowns by Corporate America -- fears validated to a certain extent by revenue problems appearing now at the boxmakers -- and also SAP's and Baan's troubles in North America, have investors spooked about

all

enterprise-computing vendors, including innocent bystanders such as i2. I'm going to keep i2 on the list for one more quarter. Hope dies hard.

The Net

It was a great quarter for many Net stocks, if sometimes a scary one. The problems with

Lycos'

(LCOS)

acquisition by

Barry Diller

Inc., worries about whether and how

Amazon

(AMZN) - Get Report

will ever make a buck, and fears of a rotation out of Web stocks, all fueled sometimes-violent price swings.

Amazon is still on the list, maybe at the very top. One leg of the Web's most powerful triumvirate, along with

America Online

(AOL)

and

Yahoo!

(YHOO)

, Amazon continues building brand ID -- and, not incidentally, sales, which should be up nicely once again when Amazon reports on its first quarter in mid-May. Its purchase of 40% of

drugstore.com

shows Amazon isn't limited to leveraging its expertise only through Brand Amazon sites. And

San Jose Mercury News

reporter Adam Lashinsky reported Wednesday -- but it hasn't yet been confirmed by other sources -- that Amazon has taken a similar chunk of Seattle-area Web grocer

homegrocer.com

. (Watch for an update column on the suddenly hot online-groceries market next week.) Fair warning: If Amazon stumbles badly, all Net stocks are in trouble. Amazon is my favorite barometer of the market's call on the health and future of e-commerce, and the barometer is still rising.

America Online is probably the easiest, most obvious single bet on the Net, and one of the safer ones -- if any Net investment can be described as "safe." At this morning's opening, 148 and change, AOL is down about 25 from its high in late January, which I count as a buying opportunity. I'm as disappointed as ever in AOL's service to its members, but as a business and an investment, well, can 16 million customers who pay $20-plus per month be that wrong? AOL was also the recipient of good news this week, when the

Internet Corporation for Assigned Names and Numbers

named AOL one of the five initial winners in its choice of competitors to

Network Solutions

(NSOL)

in the Web domain-name registration business. Domain-registration revenues won't approach AOL's monthly online service fees, but it's a nice move.

In January, I wrote about Yahoo!: "A scary valuation, yes, but lots of growth left to go." Ditto, and still on my list for 1999. Yahoo!'s become a finely tuned deal-making machine. Its announced acquisition of

broadcast.com

(BCST)

looks like the smartest of those deals yet, and may well fulfill CEO Tim Koogle's oft-expressed wish to propel Yahoo! out of the Web search-engine category into a full-fledged media company for the next century. Page views topped 235 million in March, and despite Lycos' recent claims to be the most-visited portal, I think Yahoo!'s pretty clearly the most popular, most visited site on the Web. Yahoo! is simply a growth engine, and if you believe in the future of the Web, it's hard not to believe in the future of Yahoo!

Lycos remains mired in the mess over its proposed acquisition by Diller's

Ticketmaster Online-CitySearch

(TMCS)

entity, forming a new company to be called

USA-Lycos Interactive Networks

. I'm among those who have from the beginning agreed with former Lycos board member Dave Wetherell that the Diller acquisition undervalues Lycos as well as offering much less synergy than claimed. But until Lycos shareholders get to vote on the offer in June, Lycos' share price is going to remain depressed. I suspect, by the way, that a lot of Lycos shareholders

do

support the deal, both because they have a very low basis in the stock and because after the perturbations since February's merger announcement, they're glad to get a chance to cash out before any more problems arise. With Lycos bouncing up and down around 100 today, those shareholders have gotten back some of the value they had lost since the Diller deal became known, and rather than hanging around to see how a nasty fight turns out, they may want to just get out, period.

Excite

(XCIT)

was on the list, too. Just two weeks after I posted that list, it agreed to be acquired by

@Home

(ATHM) - Get Report

for a 90% premium. (Are you listening, Barry Diller? Buyers pay a premium for hot Net acquisitions.) Since then, Excite has traded up to about 150 and opened around 138 this morning in what has been essentially an arbitrage play. The acquisition is on; the companies will make a good fit. I wrote

here that I was skeptical about the real value of this deal for @Home shareholders, and I still think they didn't really need Excite. But increasingly, having your own in-house portal/search engine looks as if it may become important for national ISPs such as @Home, so the deal looks smarter in retrospect that it did -- to me, at least -- at the time. By definition, thanks to the pending acquisition, Excite's off the list now.

I'll continue this update on hot stocks to watch in 1999 tomorrow.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long Lucent, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com".