Revisiting the 25 Winners for 1999, Part 2

Looking at the telecoms and the retailers and e-tailers.
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Here's more on the second half of the "25 to watch in 1999" list I posted here at the beginning of this year. Today: bandwidth, retailing and e-tailing.

And a note: At

TheStreet.com

we aren't trying to be your stock-pickers, and this column and

yesterday's aren't meant to be shopping lists. I'm personally very wary of "pick columns" by anyone, certainly including myself. When I made this list at the beginning of the year, the idea was to choose companies that illustrated one or another important aspect of technology and the online world. Of course, I also picked companies I thought had a good shot at being winners during 1999.

Read this, and use this, with that in mind: It's a watchlist, a look into the back rooms of technology investing -- not an order form.

Bandwidth

Qwest

(QWST)

, which I am long, has been at the top of my list in more ways than one. I first made the case for Qwest in a

column here in December. Neither that story nor my enthusiasm for this leader in the buried-fiber business has changed. Since the first of the year, the stock has roughly doubled.

A painful fall from glory hit Qwest holders a week ago, when it fell almost 25 points over five days, from an April 13 intraday high of 104 3/4 to an April 20 close of 80 3/4. But Qwest closed at 90 today, and seems back on track now that the tech revolt has largely subsided.

One thing that has changed is Qwest's increasing emphasis on finding partners with which it can sell services, so as to maximize revenue, not just renting fiber on its network. Qwest has also become one of the leading U.S. long-distance companies.

BellSouth

(BLS)

, for example, just announced a $3.5 billion equity investment in Qwest, as part of a joint venture to sell Qwest's services to BellSouth customers. Qwest just reported a strong quarter, earning 1 cent a share on revenue of $874 million -- not much, but besting the

First Call

estimates. And it announced a 2-for-1 split, with a record date of May 3 and a distribution date of May 24 (subject, of course, to shareholder approval at a May 5 meeting).

Qwest remains solidly on my list. I think it remains a highly attractive acquisition candidate, and its savvy CEO,

Joe Nacchio

, has said he'll do whatever it takes to maximize shareholder value. But with a market cap now topping $31 billion, the company is getting pretty indigestible for all but the biggest acquirers. I'm convinced Qwest holders will be better served, in any case, by an independent Qwest staying on its growth track. (Since I first wrote about Qwest and other fiber-capacity wholesalers, I've gotten a steady stream of reader mail asking if I'm worried about future overcapacity and the threat of high-capacity multiplexing. I'll address both issues in a column soon.)

MCI WorldCom

(WCOM)

, which I am also long, remains both a winner and on the list. Despite some stumbles -- it still doesn't have the wireless company it needs, and should have acquired long ago, in much cheaper times -- it remains one of the two killer-tels I think are effectively positioning themselves for the next century. Up about 20 points from the first of the year, to Friday's close of 91 3/16, MCI WorldCom is, I think, only beginning to realize its potential.

Conventional wisdom is that companies this size, in mature industries, can't double or triple share prices -- too much to hope for. I think MCI WorldCom and

AT&T

(T) - Get Report

(keep reading) are going to disprove that -- or rather, they'll show that this isn't a "mature industry" anymore, thanks to the explosions in both "telephone" technology and the demand for datacomm services.

AT&T was on the list too, and remains so, because of my conviction that this is buried treasure. Though even with a goose from a 3-for-2 split in mid-April, AT&T remains stuck in the low 50s, only slightly more than its price at the first of the year. It has become one of the most aggressive, best-managed tech or tel-tech companies. CEO

Mike Armstrong

is, along with Qwest's Nacchio and MCI WorldCom's dynamic duo of

Bernie Ebbers

and

John Sidgemore

, in the top rank of tech and tele-tech managers. The difference: Armstrong has $192 billion of market cap behind him.

The right partnerships and acquisitions (

@Home

(ATHM) - Get Report

and

TCI

, for example) and the right strategies (such as national flat-rate PCS cellular service, and offering residential voice services bundled with fast Internet access over TCI's cable network) are keeping AT&T moving. The conventional wisdom has been that the fundamental changes in the telecom business, combined with the aggressiveness of far smaller and more nimble new competitors (such as Qwest), will make T a dinosaur, unable to compete in the brave new world of telecom ca. 2000 and beyond. Armstrong has exploded that notion.

The bid for

MediaOne

(UMG)

, at a fat premium over Bruce Roberts'

Comcast

(CMCSA) - Get Report

offer, shows he's serious. Can AT&T afford that $62 billion offer, almost 25% higher than the Comcast offer? Sure: Not only does T have the balance sheet, but MediaOne's simply worth more to AT&T than it would be to Comcast.

Combine MediaOne with TCI's cable subscribers, sell off the noncable properties for a third or so of the purchase price, and MediaOne's worth the apparent 2 1/2-times premium AT&T proposes to pay over recent per-subscriber prices for cable deals. Plus, if successful, the move takes off the table UMG's opposition to AT&T's proposal to offer phone service over

Time Warner's

(TWX)

cable system.

Global Crossing

(GBLX)

, also on the list, has soared this quarter, more than doubling, thanks in no small part to the arrival of new management, in the form of CEO

Robert Annunziata

. Put Annunziata up there with Qwest's Nacchio as a super business manager and "stock-price manager." Boldness counts in this market, and the company's announcement last month of plans to lay its Atlantic Crossing 2 cable -- a third Global Crossing trans-Atlantic cable, which will by itself increase total all-carrier trans-Atlantic capacity by 25 times -- is bold indeed. And, at $500 million, not cheap.

Global Crossing added domestic capacity this quarter, buying

Frontier

(FRO) - Get Report

for $62 per Frontier share (a deal due to close in the third quarter), but think of Global as a play on the future economic importance of Europe, because I believe it will dominate U.S.-Europe wired communications.

Nice diversification here too, in a sense, for committed telecom investors: A portfolio of Qwest, MCI WorldCom, AT&T and Global Crossing would, with just four issues, make a heck of a play. Still on my list? You bet.

Corning

(GLW) - Get Report

. The dominant provider of optical fiber, Corning is seeing a big jump in sales thanks to the release of its new LEAF brand optical fiber; first-quarter sales were up a third, year over year. The stock price is also up by about a third since the first of the year, a conservative move likely, I think, to steepen throughout the rest of 1999. Underpriced but emerging; stays on the list.

Broadcom

(BRCM)

. One of two specialized chip-technology firms on the list -- along with

Aware

(AWRE) - Get Report

(keep reading) -- Broadcom has had a lousy year, after a spectacular run-up following its IPO last year. Broadcom's tilt is toward cable, though it's a player in DSL as well; Aware boosts DSL transmission speeds over traditional copper phone lines. First-quarter revenue was up 172% year over year, and 37% over the previous quarter. This year's performance is painful, but I think Broadcom is a mid-to-long-term winner, and I'm keeping it on the list ... though I have to swallow pretty hard to do so. I'd still like to see Broadcom acquired, and I'll bet shareholders would, too.

Ciena

(CIEN) - Get Report

. This one was on the list in part to illustrate the importance of infrastructure plays in tel-tech investing. Ciena's up about a third since the first of the year, but not (yet) the barn burner I expected. You may recall that Ciena and

Tellabs

(TLAB)

were going to merge last year, but the deal fell apart, clobbering both stocks.

So far this year Tellabs is up from 70 in January to 115 3/8 today -- much better performance than Ciena, and as you can imagine, I wish I had put it on the list too. I'm adding Tellabs for at least the next quarter. Both are likely to remain important infrastructure suppliers, and I see no clear basis at this point for choosing between them. Nor the need to.

Aware. Another tel-tech infrastructure play: Aware, which I am long, is the big player in licensing the technology that allows phone companies to deliver the sub-optimized G.lite version of ADSL broadband access to homes and offices. I don't like the punt in dumbing-down DSL, but the telcos love it, since it saves them money by eliminating the need for a telco employee to come to your site and install the splitter required for full-strength DSL.

Aware's been on a roller-coaster ride lately, but if you got in in January when I listed it, you've got a double. Still, the fall from 78 3/4 on April 13 to 46 six days later was scary, indeed, even with a recovery to 55 1/4 today (itself down from yesterday's 58 3/4). Revenue for the first quarter rose 115%, and net income swung to a modest but welcome 3 cents per share from a loss of 7 cents in the year-ago quarter. Clearly, Aware holders have to accept much greater-than-market volatility, but that's part of the tel-tech infrastructre game. Staying in.

Retailing & E-Tailing

Wal-Mart

(WMT) - Get Report

, which I am long, was one of my quixotic retail picks. Up this quarter about 25%, and very much still on the list. In a technology-heavy watchlist, this successful megaretailer is a fit because it has refined so well, and depends so strongly, on potent supply-chain technology to manage the company. (Do you know that Wal-Mart has more than 1,000 programmers at work in corporate HQ in Bentonville, Ark.?) A 2-for-1 split earlier this week is likely to help, too. Still prospering, and likely to continue to do even better as long as the economy holds. Maybe even if it slips, because that's when well-managed value-price retailers really shine.

Gap

(GPS) - Get Report

. On the list; share price up 27% this quarter; it stays. For the fourth quarter ended Jan. 31, Gap (which I am long) posted a year-over-year sales increase of 40% and earnings up 46%. Results for the full year were very close to those numbers.

Gap's store mix continues to improve: The number of actual Gap stores is almost unchanged,

Banana Republic

storefronts have increased slightly,

Gap for Kids

is up more, and

Old Navy

, the hottest part of the company, has exploded to 398 stores from 282 over the past year.

Gap Online

(www.gap.com/onlinestore) is growing nicely, and while not a material contributor to revenue -- a tough test in a company with annual revenue of $9 billion! -- is part of Gap's ongoing repositioning for the next century.

Staples

(SPLS)

is becoming an important e-tailer, in a category, office supplies, that lends itself beautifully to electronic commerce. Unlike so many successful category retailers, which have largely stuck their heads in the sand and ignored the Web, or made only token stabs at e-commerce, Staples understands that it can't protect the bricks-and-mortar side by putting up a weak Web presence.

Up only modestly so far this year but with good support from analysts, Staples appears headed for a record year.

Staples.com

, the Web site, is well-organized, with lots of personalization options for faster shopping, plus free shipping on orders over $50 and next-day delivery in many urban areas. One to watch; still on the list.

Office Depot

(ODP) - Get Report

. On the list, and a bad pick so far this year. Office Depot has been struggling in the low 20s, split-adjusted, all quarter, and even a 3-for-2 split on April 5 hasn't helped: The company has been having trouble this week holding on at 20. The Depot's Web-site sales hit $50 million for the first quarter of 1999, a big jump over just $66 million for all of fiscal 1998. PC sales, especially to small businesses, have been important for the company, both online and in the stores; it sold almost $3 billion worth in 1998.

But falling prices for just the kind of value-priced PCs small business buys, and growing comfort with direct PC marketers by those small business, have hurt Office Depot ... and that pain is going to continue. There is an argument that at around 20, the stock hasn't got much further to go on the downside, and that at that price, a pick-up in the stock price could deliver a nice return. Maybe, but "how much worse could things get?" isn't my kind of story. Office Depot's off the list.

Home Depot

(HD) - Get Report

. The beast moves slowly, and continues to waddle through a lackluster quarter. Retail sales are still strong, but margins are suffering as the company battles in many areas with competitor

Lowe's

(LOW) - Get Report

. The company says it's committed to doubling the number of its stores by 2002, to about 1,600.

America already has a surfeit of building-supplies centers, so Home Depot says the overwhelming majority of those will open abroad. It recently snatched a top

Ikea

exec, Andres Moberg, to run international operations.

Home Depot still doesn't get it on e-commerce. The HD HomeMinder program, which it was piloting last fall seems dormant, and its lame Web site (www.homedepot.com), still doesn't sell anything, but offers a revealing note, posted on the site last October, and unchanged since then: "As soon as we are ready to provide you with the same great service and experience as a trip to your local Home Depot store, you'll be able to shop with us on-line!" Well, ya-hoo, guys! Wake up to the 24x7 world, Depot. Off the list.

Brookstone

(BKST)

was my long-shot pick in January. Visit a Brookstone store and you'll see a great Web-store merchandise mix, and among the customers milling around, a near-perfect sample of the Web-buying demographic. And you'll wonder: Why isn't this company a power on the Web? Where have they been?

Well, for a long time, Brookstone's feeble Web presence was just too hard to find, at www.brookstoneonline.com. Now the address drops the superfluous "online," so it's much easier to find. Now the merchandise mix online is much larger and better. So will Brookstone now succeed in attracting enough online buyers to create the right mix of storefront and online sales? Another couple of quarters will tell ... and I'm going to keep it on the list, to find out.

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 Aware, Gap, Qwest, Wal-Mart and MCI WorldCom, 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.