The Sound (Advice) of Husic

The TaskMaster recounts a visit from Husic Capital Management's Frank Husic.
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SAN FRANCISCO -- Frank Husic, managing partner of

Husic Capital Management

, stopped by

TheStreet.com's

offices here Tuesday for a "meet and greet" session. While that might not be as

cool

as traveling to Saudi Arabia for an audience with the billionaire prince, I found the encounter downright enjoyable. I've tried to distill the salient points for your reading and investing pleasure. (I've also tried to distill gin, but without much luck.)

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TSC

message boards.

Given the informal nature of the get-together, we talked about a lot of things. We talked (believe it or not) about how the

G.I. Bill

set the stage for America's economic boom in the second half of the century. We discussed how the demographic makeup of the U.S. population and the highly efficient (and unequaled) capital markets here make a compelling argument for continued stock-market gains.

Finally (on the big themes), Husic revealed a belief the "big risk" right now remains "deflation and a replay of the 1930s." Despite the market's current fixation on inflation's potential revival, the hedge fund manager sees the U.S. as the "only internal organic growth" economy in the world.

"There are billions of people

abroad willing to work for peanuts," he continued. "If we don't produce enough growth to employ them, ultimately this will end badly. The risk is still deflation, not inflation. All the guys who pull the levers are looking the wrong way."

Nevertheless, Husic is far from bearish.

"I think there's some real still powerful positives as far as the flow of funds and valuations," he said. "I certainly think 2000 will be another year with a lot of volatility,

but that comes with the territory in a bull market."

For Husic's outlook to change, some "broad trends still in place" would have to reverse.

A Timely Call

In that sit-down yesterday (and in a follow-up call today), we also chatted some about stocks, about which Husic knows a thing or three. Husic Capital has nearly $4 billion in assets under management and offers a variety of products. As of Oct. 31, the aggregate year-to-date performance of the various accounts was a rise of 34.4%, including a 51.5% gain by the "classic" hedge composite, according to the firm.

A key factor in this year's performance was Husic's shift late in the first quarter from being overweight Internet names to focusing on semiconductors. Investments included names he's still long, such as

Cypress Semiconductor

(CY) - Get Report

,

KLA-Tencor

(KLAC) - Get Report

and

Applied Micro Circuits

(AMCC)

.

Simultaneously, Husic also shifted some assets into oil-service stocks like

Nabors Industries

(NBR) - Get Report

and

B.J. Services

(BJS)

, and media companies like

Viacom

(VIA) - Get Report

and

Comcast

(CMCSA) - Get Report

.

In late October through early November, the hedge fund manager returned to Internet stocks because the fourth quarter has been a seasonally strong time for the group. Additionally, he saw "a new set of companies that were going to be leaders in the marketplace," including business-to-business stocks he's still long, such as

Ariba

(ARBA)

and

Commerce One

(CMRC)

.

Commerce One is one of several 1999 initial public offerings Husic invested in -- and in which he maintains holdings. Others include

e.Piphany

(EPNY)

and

Broadbase Software

(BBSW)

.

As with 1999, Husic believes the big winners next year will come from IPOs. However, he makes a distinction between names that enjoy an opening-day flowering vs. those able to rise "20 times after the dust settles."

Other predictions for the coming year include an expectation the video-game business will prosper, with the potential winners (and current longs) being

Electronic Arts

(ERTS)

and

3DO

(THDO)

.

Like just about everybody else, Husic sees the promise of broadband but is unsure which delivery system will emerge victorious. Thus, he prefers names that will benefit regardless of whether telephone, satellite or cable (or something else) cracks the Holy Grail, including

Broadcom

(BRCM)

and

Gemstar Communication

(GMST)

.

He's also high on companies such as

BSQUARE

(BSQR) - Get Report

that can piggyback off the growing trend of Internet access via products other than traditional PCs. In a similar vein, he likes (but has no current position in)

Sandisk

(SNDK)

, whose flash-memory products benefit from the growing use of digital cameras and music.

The risk with companies such as these is they're on "such a high-growth trajectory, it's difficult to maintain, and even a small change to any part of the operation can lead to dramatically magnified repercussion," he said, Sandisk being a prime example. "Short-term results can be quite volatile."

And Finally

Husic declined to discuss specific shorts but acknowledged betting against tech stocks this year has been a dicey proposition, despite a fair number of implosions.

The reason, he claims, is big (mainly foreign) firms like

Deutsche Telecom

(DT) - Get Report

and

Alcatel

(ALA)

that realize they are "facing elimination" if they don't change.

Thus, while every other pundit says it's a bad idea to invest on the hopes of a takeover, Husic says even companies "without dominant technology," such as

Cabletron Systems

(CS) - Get Report

, which he is long, and

Newbridge Networks

(NN)

, could garner interest from these lumbering Europeans.

These companies "see themselves as victims, and they're not going to do down without some action," Husic said. "CEOs don't usually lay down in the road to be run over."

Those CEOs may be dumb, but they ain't stupid.

Speaking of misguided thinking, the purpose of this exercise isn't to say, "Frank Husic is invested in these names, so you should buy them, too." Long-standing readers of

TheStreet.com

know better, but I figure some folks need a reminder every once in a while to do their own homework (or no TV before bed).

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com.