This is the second half of a two-part story. Please be sure to read the first part.

5. What are some companies whose shares might be tempting but are still too expensive?


Let's start with

Brocade Communications


. It's had a big jump off the bottom and sells at 175 times the 2001 consensus estimate. Is that a cheap stock? No, it's not. I mean the fundamentals there may be better than at a lot of other companies, but I certainly wouldn't be buying any technology stock in this environment at 175 times this year's earnings.



-- maybe this is alphabetical: Broadcom's stock went from 274 to around 20 and has since doubled off that base. It's back to 110 times this year's earnings. Now Broadcom may have the greatest communication devices or chip for broadband, but do I want to pay 110 times earnings for a chip company, no matter how good, in this environment? I don't have the confidence to do that.

Continuing sort of alphabetically,

Network Appliance

(NTAP) - Get Report

: Everyone loves storage, and network storage is going to be big. The stock has gone from 152 down to 11, and now it's back at around 25. OK, it's still down from 152, but it's at 163 times this year's earnings estimate. Is that a bargain? Not how I look at it.

6. The dizzying range of ratings issued by analysts, many of who are more beholden to the companies they cover than investors, doesn't make it any easier for investors to find their way around this market. When we last spoke about four months ago, we talked about how Wall Street analysts are hopelessly conflicted.


It's terrible!

Now that analysts are being vilified for giving sweetheart ratings to current and potential customers, are they being any more honest?


(Laughs) I don't think I've seen any material change. Analysts are maybe being a little quieter. They're maybe not making as many changes as they used to, and I think they're a little bit scared to do anything, but I don't think things are going to change there.

If you're a sell-side analyst, if you recommend a stock, you're almost always better off recommending a stock than not recommending a stock. If it goes up, of course, you're going to look good. But it's the only way you're going to get any underwriting business from that company or from that industry.

We get information from the Street, but we're never going to buy or sell something because some analyst is recommending it or not recommending it. And you probably would have done yourself a favor in the last couple of years by not reading any Street research at all. (Laughs)

7. Year to date, the fund is down about 12%. What return are you expecting at year-end?


I don't have a good sense of that and let me tell you why: Volatility. I think this year is going to be a mirror image of last year. I think the fourth quarter of this year for the stock market could be very big. In 1999 and 1998, we had 30% returns in the fourth quarter, and in the first quarter of this year you're down about 20%.

With that kind of volatility, quarter to quarter it's hard to get a sense of what to expect for the year. However, I think we will have a positive return for the year because I think the stock market will work its way higher as it looks to be a better economy and confidence returns and the technology news starts to get incrementally better. I think that from this level we could get a 30% return between now and year-end.

So, I think somewhere plus 10%-20% is not an unrealistic expectation, admitting that trying to forecast that is very dangerous this year. But I think it's very possible. We've had one or two days this year where the fund was up 5% in a day. It doesn't take long to make up ground in this kind of an environment.

8. Over the past year, what was your smartest move and what was your biggest mistake?


(Laughs) Talk about mirror images. Smartest thing I did was taking $400 million of profits in high-priced technology stocks in January and February of last year. The thing I regret the most was putting a lot of that money back to work in the summer, fall and winter by underestimating the severity of the technology downturn.

So, I saved myself 1000 basis points

10 percentage points of performance by cutting

the fund's tech stake when I did, and I would have saved myself another 1000 basis points if I'd just left that money out of that sector instead of putting it back in. So, that's what I regret. I just wish I'd been a little bit more patient to see how things played out.

9. Let's play word association. I'll name some tech bellwethers, and you'll tell me if you own shares and give your outlook for the company and the stock. First off, Cisco.


(Laughs) I own shares, and if Cisco is still a great company then it's a great time to buy the stock and own the stock. I still think it's a great company, otherwise it's not something you'd want to own.

You see them emerging from this downturn still as a leader?


Based on the information I have today, you can go right down the list: Cisco,

Sun Microsystems

(SUNW) - Get Report

, Nortel Networks and


(GLW) - Get Report

. If these were great companies a year ago, if they're still great companies today, then forget about 2001 earnings, you want to own the stocks at these prices.

The question is, are they still great companies? And if you don't think they are, you probably don't want to own them, even at these prices. But if you think they are, then you definitely want to own them. But you're going to have to be a little bit patient with them.



I own Microsoft and I think it's fully valued at 71. I was a buyer earlier this year at 45; I've cut back a little bit in the high 60s.

Intel (INTC) - Get Report, I remember -- sorry to haunt you with this -- at last year's Morningstar conference you said that it's a stock you'd own for 10 or 15 years. What about now?


Still own the stock. I haven't lost much confidence in Intel. They're going to be around in 10 years and in 15 years. And it may not be the best performing stock over the next 10 years, but I do think that they have the capacity to surprise people on the upside with new technology.

You can't spend $7 billion or $4 billion a year with a lot of smart people and not come up with, I think, some great ideas. They will make more acquisitions, away from the PC orientation of their business to reduce that dependency. But I happen to be in a camp that PCs aren't dead. I don't know what else people are going to use in their offices and for education, but I don't think it's going to be telephone screens.

Controversial name: Lucent.


(Laughs) Don't own it. I'd say it is a good speculation now, but I don't think it's appropriate for my fund right now. It's a speculation for somebody's personal account, not for my mutual fund.

10. What three companies do you have the most confidence in over the next five years?


I'm going to say


(PFE) - Get Report

because of the breadth of their products. With eight $1 billion drugs, with a $5 million research budget and with the aging of the population, I think Pfizer is as close as you can get to a sure thing. It's a double-digit earnings grower, I think close to a 20% grower.

Then I'd say

State Street

(STT) - Get Report

is another one that has been a great investment over the last 20 years, and I think it will be a great investment for the next five years, certainly.

They're sort of the picks and shovels of the fund business, right? They do a lot of back office stuff, record keeping.


Yeah, their business is providing services essentially to the mutual fund institutional investment community. They're the custodian for something like 40% of all of the mutual funds in this country, and they have a lot of other services that they will wrap around their custody business.

It's pretty much a pure play on providing institutional investment services. It's a scale business, and there are fewer and fewer players to compete with for them and they have grown earnings at a double-digit pace going back to the early '80s.

Lastly, EMC because of their leadership in data storage and because of my belief that the storage business is going to be a very big one. I wouldn't want to bet against EMC from this price.

If I had a fourth one, I would, I think I'd put on the No. 4, I think

AOL Time Warner



which should be on the list because of its diverse revenue streams, mixed subscriber base and status as far and away the dominant internet access provider. I don't see anybody coming along to challenge them.

I mean, I just don't see it. And I see the way the teenagers all communicate all over AOL. While they're doing their homework, they're chatting with each other on AOL. So I think that's a pretty strong franchise. So those are the four picks, and I think you can put those away for five years and you'll be pretty happy when you come back.

I would like to think, Ian, that all of my stocks are great stocks for five years. I'm sure some will be lemons, it's the nature of the beast.

Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Ian McDonald writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to, but he cannot give specific financial advice.