You could say the tech sector is in a blue period, but that would be a bit kind.
Assets: $3.03 billion
3-Year Annualized Return/Ranking: 33.2%/Beats 89% of Peers
Load/Expenses: No-load/1.83% annual
Source: Firsthandfunds.com and Morningstar. Performance through Feb. 23.
How bad are things? A year ago shares of
, tech's heavyweight champ, were selling for almost $70. Last Friday they closed at $27 and even this must-own is looking punch drunk.
Given tech's continuing funk and the stunning amount of cash investors have riding on the sector, through stocks or funds, now is a good time to talk to the guy many regard as the fund world's heavyweight champ of tech investing:
Kevin Landis, who's showed a knack for trouncing his peers with his
Firsthand Technology Value fund.
Landis admits this market is "brutal," but he's still a believer in the Internet. That said, he's not buying dot-coms or PC stocks; he's seeing money in semiconductor shops, like
, whose chips help run networks. And, he's even seeing a solid growth story in local phone companies, which have been far from investors' must-own lists.
Maybe you think he's talented, maybe you think he's lucky. No matter what camp you're in, his track record makes it worth your time to see how he weighs in on the tech sector and even a recent critic, my colleague
1. What do you think of the tech sector today?
(Laughs.) The word is brutal.
The name of the game is always secular growth, or finding companies that can keep growing their earnings even if the economy is sagging. Where do you see secular growth in terms of industries and companies?
Well, I'll tell you that right now it seems like there's no growth anywhere, and the reason for that is that we have this
tech inventory backup. And so you have companies like
canceling millions of dollars worth of orders. It doesn't mean that their business has stopped. But it does mean that they need to clear out their channels and kind of absorb some of this extra product that they're sloshing around.
So if you're trying to get your arms around the rate of growth, you have to pick a longer time horizon than just a quarter or two, because in the next quarter or two we're just going to be ringing out inventories.
By the way, any time anybody's talking about inventories, they're always talking about a one- or two-quarter time horizon. And when people are looking at a longer time horizon, they tend to look past the inventories.
If we look past inventories, where do you see growth?
I think people have gotten used to the idea that the world's communications networks are carrying more and more data traffic. The voice traffic is growing very slowly, it's less than half of the traffic now, and the revenue on the voice side is declining. Not just declining as a percent, but declining outright, because the costs and prices are coming down faster than the total traffic is growing.
What the carriers now are still trying to work out is how to adjust their business model to make more money off of the data network. And so that adds up to immediate term demand for networking and communications equipment. In other words, the Internet infrastructure.
Think of it as Cisco's customers. Cisco's customers, the carriers, stand between all this great technology and all this great end demand for communications services, and they're struggling with two big transformations. One is transforming their network from the old-style voice network to the packetized data network. The other is transforming their business model.
2. So to put it in a nutshell from an investor's perspective, who do you think is standing in the way of growth and who's looking like they're in a sweet spot?
It's the carriers transforming their business model to try to link up. You can almost envision the carrier: On one hand they're hanging onto the customer, trying to figure out what the customer will pay for in the way of better services. On the other hand, they've got their suppliers with all this great next-generation networking technology trying to figure out how they put their network together and how they bill their customer. But it's really the carriers that have to go through this wrenching process.
I'm really intrigued that you're seeing something in the carriers. That's something that I haven't heard from a lot of folks. Specifically, what companies are you looking at there in terms of being able to eventually adapt themselves and their models to be players in kind of a new way.
Believe it or not, I think you have to take a look at your local phone company.
Your local phone company owns you as a customer. So in this transition, they've got sort of a piece of driftwood that they're not going to let go of. They sell you dial tone, and that means that they have a cash cow they can use to fund things.
They don't have to build their other services on faith, they can build it off the dial tone cash cow and then later on, the Caller ID and the call waiting cash cow. I think that's where to watch the game.
3. We saw a lot of those companies just brutally sold off toward the end of last year in particular. And a lot of them had a very nice, but quiet, bounce earlier this year. Is this the start of something, or do you think that that was just a pop after a lot of window dressing by fund managers?
Well, I'm looking at the various January rallies and early-in-the-year rallies. I think it's pretty clear that people are ready to buy these stocks if there's good news. But the companies need to provide the good news.
I wonder if some of that early buying was maybe more valuation driven.
A lot of it could have been valuation-driven and a lot of it could have been, "Let me just buy this stock in case there's some good news coming, because I know it's cheap now," and then the good news hasn't really shown up yet.
But I really believe that when stocks are in the doldrums like this you really need two things: An investment community that's in the mood to buy them, and you need them to come up with some reassuring good news. And nobody has any visibility right now, so the companies lack the ability to reassure.
Sources: Morningstar and Baseline/Thomson Financial.
4. When you look at other sectors, where aren't you excited?
I'm still not very excited about the PCs. Those are just sort of the leaves on the tree. There's a lot of them out there but it doesn't look any more like a great business than it did a year ago or two years ago.
I'm still not that excited about most of the dot-coms. I know that a lot of people are currently playing a game of let's figure out who's going to be left standing and see if these are great entry points on
. I'm not arguing that that's a dumb thing to do, but it's not really us.
I think a lot of the people who are trying to figure out if this is the right time to buy Amazon or if this is the right time to buy eBay actually think that this is a franchise for the next 10 years and probably think that this is their entry point. And I think, similarly, someone who is looking into trying to find a bottom on
is probably thinking that franchise is in place and will endure for a while, and that this is their chance to buy it.
But those don't really tempt us.
You see riper fruit elsewhere?
Sure. Once the inventory gets cleaned up -- there are people in our shop who think it's six months; I'm more inclined to think it's closer to three months -- then the growth stories will again be able to show growth. They'll be able to talk about great visibility and they'll start to get growth valuations again. Those will be great stocks to own, I think, and that's where we're repositioning our portfolio right now.
Mostly in the so-called New Tech? The firms that are getting more of their earnings growth from the growth of the Internet rather than the maturing PC sales?
Right. We really try not to be tied too closely to the PC.
You raised an interesting point about clearing out the inventory hangover. A lot of growth investors say they see a second-half recovery, and other folks are saying this second-half recovery is just a crutch. It sounds like you're seeing the recovery.
Right. And I don't want to draw too much from any few data points, but consider the Cisco example. Cisco is currently buying used equipment. They're buying their own product back from customers that have gone belly up.
And they're refurbishing it and reselling it to their most price-sensitive customers. What they're doing essentially is seizing control of the gray market, and the reason they're trying to seize control of the gray market is because they have to, because that gear is going to be out there floating around and they're competing with their own product otherwise.
Well, that's a pretty brutal thing to have to live with. It's a sign, basically, that this slowdown is a lot more related to inventory than you might otherwise think. In other words, if business slows by some certain percentage, you know that one component of it could be inventory absorption, and another component of it could be a slowdown in demand.
Well, the bigger the component is inventory, the more intact end demand is. So when I hear stories that there's a lot of inventory out there, and it's not just inventory in the channels but it's inventory coming back from the defunct dot-coms, I think that's great, because we're going to burn through that once and then it'll be over. So I actually, maybe it's a perverse way here, but I take a a little bit of comfort in that.
Definitely a different mind-set from 1999, wouldn't you say?
Yeah, a little bit different. But the other interesting thing is in these slowdowns, technology often speeds up because the firms have an incentive. The firms need to give their customers an additional reason to buy product. They can't just rely on insatiable end demand. So they have to go back in and end-sell against their installed base, and that's usually a good thing, because by stimulating the technology you end up growing the market.
5. Anybody that invests in tech knows how painful hindsight is. Everyone at some point wonders how they underestimated a product or trend. And then on the flip side, they wonder how they overestimated a trend or product that fizzles. With that in mind, what would you say we're missing today? And what are we making too much of?
Well, I go back to what you can hang your hat on. The world is not yet wired. The world is not yet as connected as it needs to be, and people have only just started figuring out how to make best use of their Internet connection.
Somebody was telling me once -- it was a interesting way of looking at it -- think about how many years passed between the invention of the telephone and the invention of voice mail. And think about what a great productivity tool voice mail is.
Now the Internet has only really been commercialized and available for most of us for less than a decade. We're really only just now beginning to figure out how to pick up its tools and really do something with it.
I'm feeling like Arthur C. Clarke with the chimps holding the bones, (Laughs) but you know what I mean. But we're starting to figure this out. It may not be possible to see how you get from A to B but you know you're going to get there. Or, to get from A to Z you know you're going to go through the letters of the alphabet, but we don't know the order.
Right now we've got a little bit of inventory buildup. Right now the carriers are having a little bit of trouble figuring out what their business model ought to be and how they can make money satisfying the demand. But the good news is, there's great end demand out there.
Here's another way to put this -- I was laughing the other day when I heard this. Everyone is saying the Internet bubble burst, yet the vast majority of people still don't have broadband access. Yeah, the Internet bubble burst and why can't I get DSL? Well it all came and went before I got to see it.
So there's a lot of people still out there waiting to see it.
What are we overestimating?
You know, there was a great quote -- and I wish I remember who originally said it so I could give proper attribution. "Never confuse a clear vision for a short distance."
What he meant by that was, if you can see that at some point we're all going to have really cool cell phones, and if you could have seen that 20 years ago, it might have been a long 20 years that went by, but I bet 20 years ago there were certain people who saw that with great clarity.
That's not the same as saying that just because you have that vision and you can see where the world is going that you're going to get nothing but good news next earnings season. So I think if there's something that people tend to become overexuberant about it's how quickly they're going to get these results.
Things take time. I've noticed this since my days at
: Most of the really big technology trends, the important ones, they end up being much bigger than people ever originally dared hope. But they also end up taking longer, and as that time line gets stretched out, there's room for some stumbles along the way, that doesn't mean they're not going to get there.
Can you give an example of something that's out there now?
Well, I think that the best example that I can think of on the wireless side is probably 3G
third-generation wireless. People talk about getting the Internet on your phone and yet you're not going to view a nice big Web page, people aren't going to read your column on their phones.
Right. They'll get sports scores and a 10-word email.
Exactly. There's also a behavioral change that has to go on. Consumers can be maddeningly slow in changing how they look at things. Right now, most people use their cell phones just for voice. Guess what? I still use my cell phone mostly for voice.
I would think that figuring out how you get the Internet into everybody's cell phone and get everybody really using it, that's going to take some time.
6. Would you mind playing word association with some bellwether companies? Just give me your quick take on them -- I'd like to assume a time frame of at least three years or so. Also, please note if you own the stocks in any of your funds.
You're going to see words like dead and gone. Or still alive.
(Laughs.) I feel like saying one word. But I'll say big successful company.
Three years out?
I think the challenge for them is to find growth. Their success has led to a size that makes it hard for them to show a really nice growth rate. They're so big now, it's hard to grow at a really sexy rate. And as long as they hang onto their cash cow, that is the PC operating system, that part of the business isn't really going to grow that much. We don't own Microsoft.
Next one: AOL Time Warner (AOL) .
Great franchise. You could argue that there's still the growth issue, because they're pretty big now. But they could also become the model of how you make money on the Internet.
AOL made good deals, they went for growth when it was right, they knew how to turn a profit, they were the first ones on the Web to turn a profit. Now with Time Warner in the mix, they might again show that they're very good business people and they know they can still be the model on the Internet.
We own AOL in the
Tech Leaders Fund .
OK. EMC (EMC) .
EMC, which we own in our Tech Leaders fund, is a very big, very successful player in a high-growth market, storage management. So you could put them in that column of companies that stands a good chance of posting really impressive growth over the next year.