The Bottom Is Close, but Not Close Enough - TheStreet

Close doesn't cut it in most disciplines. Play the wrong note in a piano recital and the audience hoots you off stage. Pitch a ball a fraction of an inch off the plate with the bases loaded and you walk in the game-winning run.

But in long-term investing, plenty of experts believe that getting close to the best possible price for a stock can be good enough. Why wait for

Oracle

(ORCL) - Get Report

to go any lower, the argument goes, when it's already 60% off its high? Just buy it now and hold it for 10 years. Don't try to time the bottom.

If you look back at selected rough spots in the last two decades of the bull market, the proponents of

buy-big-caps-now-and-fuggedaboutit

seem to have a good point. But the truth is, it all depends on which rough spots you looked at and how long you were willing to wait to be right. That school would have been correct about, let's say, drug giant

Merck

(MRK) - Get Report

in the early 1990s after a two-year soft spot, but wrong about

General Electric

(GE) - Get Report

for the entire 1970s, when it was essentially flat from 1971 to 1981.

Indeed, the historical record suggests that impulsively going long the big techs right now might be the financial equivalent of those stupid stunts on NBC's new reality TV show, "Fear Factor." Except there's no prize at the end. And you're not wearing protective gear. And you probably don't have insurance.

But don't take my word for it. Two weeks ago, I let you

hear from hedge fund manager Mr. P, who is a bit removed from the fray considering that he mostly trades index, bond and currency futures. Let's hear now from three veteran, tech-focused money managers from around the country, one from the East, one from the Midwest and one from the West.

Betting There Won't be a Depression

Mr. West Coast is my straw man, the most sanguine of the bunch. He represents the hopeful crowd. Henry Hewitt, manager of the

(LUXRX)

Light Revolution Fund, has lit up his rival tech managers since the early 1990s, outpacing most competitors and the

Nasdaq Composite

by buying profitable, large-cap growth stocks trading at what he considers to be relatively low valuations.

"Every other tech fund manager is trying to buy the next

Cisco Systems

(CSCO) - Get Report

at 25 cents, but that's too hard," he says. "I don't know how to do it, and judging from their performance figures, neither do they. I stick with large profitable leaders and limit myself to one enormous blunder per year."

His one enormous blunder over the past year, he admits, was

Palm

(PALM)

, but that leaves his card open to be right on everything else. And his attitude today is that you're going to tick off your incredulous grandchildren if you don't have a good explanation for why you didn't buy the real Cisco Systems in 2001 at around $15, or

Intel

(INTC) - Get Report

around $25 or

Texas Instruments

(TXN) - Get Report

around $35. "If it takes Cisco 10 years to get back to $80 from here, you'll make more than 15% on your money," he insists. "And absolutely the only way that doesn't happen is if we're on the verge of a depression."

A former Latin professor and

Merrill Lynch

broker, Hewitt invests his fund in a list of 65 stocks that he believes are at the heart of the information revolution. He rebalances the stocks annually, so it's never overweighted in a couple of names. He draws his current optimism primarily from the notion that excitement over the powerful new 64-bit microprocessor from Intel combined with a powerful new operating system from

Microsoft

(MSFT) - Get Report

will serve to ignite a PC-buying spree among both consumers and businesses that will jump-start all technology stocks. (Editor's note: Microsoft is the parent of

MSN MoneyCentral

.) Echoing a line attributed to tech pundit and fund manager Michael Murphy, he declares that PC owners are about to "leap from a Ferrari into a Lear Jet" -- and that excitement will lead to the purchase of more software and hardware accessories and Internet infrastructure than ever.

I must admit it's refreshing to hear someone that optimistic. So what does he like right now? His favorite is semiconductor-equipment maker

Applied Materials

(AMAT) - Get Report

. He calls it one of the best-managed companies in America and notes it is trading at half its 52-week high with a

price-to-earnings ratio (P/E) on trailing 12-month earnings of 20. "If you agree with me that a depression is a low-probability event, then you need to buy AMAT right now," he says.

But what if you think a depression isn't likely, but a long, drawn-out recession is?

Three Strikes

That's the intellectual territory inhabited by Mr. Midwest. You've met him

before in this column -- it's Bret Rekas, manager of

Lakeside Investment Partners' Bull & Bear LP

hedge fund in Minneapolis. Rekas knows tech inside out from his days as an influential analyst at brokerages

Robertson Stephens

and

Donaldson Lufkin Jenrette

, and he doesn't like anything long right now. In fact, he's not looking for a technology recovery until the second half of 2002, not 2001.

"Back in December, the market rallied when people said business couldn't get worse. But it did get worse," he said. "And then the market rallied in April when they said it couldn't get worse. But it did get worse. Now the same people are telling you that a fourth-quarter recovery will solve everything. And they are going to be wrong again."

Rekas thinks that tech investors are just going to stop speculating on a recovery at some point this summer and just park their funds outside of the sector until they see "the whites of their eyes" -- a real, documentable pickup in technology buying by businesses and consumers. He scoffs at the notion that it doesn't matter whether you buy a stock like

IBM

(IBM) - Get Report

at its current price near $112 or at less than $90 maybe over the summer. "Using the 'long term' as a crutch to just buy now and wait for a recovery is just an excuse not to think," he says. "It's pure ignorance. It's delusional."

The problem: He thinks tech companies' earnings will continue to deteriorate well into next year as business adjusts back to a pre-1998 level -- that is, before the

IPO-fed bubble of telecom-, Y2K- and dot-com-related buying. This means that no level of low P/E ratio is safe until the E, or earnings, part of the equation stabilizes at a sustainable rate. And it means that he believes companies like

Juniper Networks

(JNPR) - Get Report

and

Siebel Systems

(SEBL)

are still vastly overpriced. "I started shorting Juniper at $191," he sniffs. "It's at $31 today, and I have no plans to cover."

What intrigues him? It's a small list. Texas Instruments under $30; British chipmaker

ARM Holdings

(ARMHY)

under $5.50, mostly because of its unassailable position as a patent holder; and

EarthLink

(ELNK)

because of the buyout potential and subscription revenue.

A Bear's Bear

Mrs. East Coast is wedged uncomfortably between Rekas and Hewitt. She's bearish, but as a natural contrarian, she's bugged that everyone else is, too. She won't let me name her, but let's just say she's the top technology analyst at a very large fund for the super-rich in New York (why do the super-rich get the best of everything?). Last September she was extremely bearish on technology, especially semiconductors; by March she had lightened up and confidently forecast a rally.

Now she admits she's confused. She conducts her own analysis by collecting information bit by bit; she specializes in talking regularly with the chief information officers of large companies across the

Fortune

500 industrial spectrum and simply asking them whether they plan to buy more or less software and tech gear in the next 12 months. The problem today, she says, is that 25% say they're going to spend a little bit more than last year, 25% say they're going to spend less and 50% say there's no change in their plans.

In her view, the question of a second-half recovery thus comes down to what you believe the "magic number" for IT spending growth will be in 2001: Will it come in above, at or below its 20-year trend? Here are the pieces of this puzzle: She says the long-term trend is 9% annual IT spending growth; we're coming off a year of unprecedented 21% growth; and the historic low is 3.5% in 1990-91.

She believes companies are not expecting a trend-matching year, but they're also not expecting to spend nothing. So she's figuring on 4% to 6% spending growth, a figure that buttresses the notion that sales in the fourth quarter of 2001 for the firms that sell stuff like routers and enterprise software will come in at the low end of Wall Street's current expectations. And thus stocks that are priced for a sharp "snapback" in that time period will get whacked.

Now aren't you sorry I asked? With apologies to Mr. Hewitt, it seems that the only light revolution in evidence today is the circle of stars in front of dazed investors' eyes.

Close enough

isn't here yet. Until managers like Mrs. East Coast are ready to buy with conviction, the jumpy trading range of the past few months probably continues -- with a mild downward bias.

At the time of publication, Jon Markman did not own or control shares in any of the equities mentioned in this column.