Big-Name Hunting : Nervous Technology-Stock Dean Shuns Smaller Issues
Dan Leonard, 60, has managed the Invesco Strategic Technology stock fund since 1985, which makes him one of the deans of tech stock investing. The fund’s 10-year gain through Sept. 30 was 626%, compared with 425% for the average tech stock fund, according to Lipper Analytical Services. In the first nine months of this year, Leonard’s $840-million-asset fund ranked 11th of 42 tech stock funds in performance, with a 20% gain.
But Leonard is nervous about the tech sector today. He talked with Times staff writer Tom Petruno about his outlook and the rigors of investing in such a volatile but promising industry.
Question: You’re beating the average tech-stock fund by about 6 percentage points this year. What has been working for you?
Answer: For one, we pulled back from semiconductor stocks early on. And we built up a position in the computer services companies, names like National Data and First Data Corp., which have done very well.
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Q You also were holding a lot of cash going into the July market decline. How much?
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A We had 30% of the fund in cash.
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That’s huge!
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A It was. I had to write a memo to our compliance department explaining it, because I’m not supposed to go over about 20% cash unless we’re in “unusual times.” Well, those were unusual times.
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Q What bothered you so much about the market in early summer?
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A Stock valuations [price-to-earnings ratios] just seemed too high. It was very difficult to find anything worth buying. And I hate to say it, but I think we’re in a similar situation today.
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Q But you bought tech stocks heavily when the market fell in July?
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A Yes. I put about $100 million in cash to work. I bought names like Microsoft, Intel and BMC Software--a lot of the bigger-capitalization tech names.
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Q Why favor the bigger names over smaller tech issues?
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A I’m wary of smaller stocks, especially looking into 1997. In January, Nasdaq market trading rules are going to change, and it’s going to be a lot tougher for dealers to make money trading smaller stocks. I think it’s going to affect the liquidity of those issues [making them more volatile].
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Q What is your cash position now?
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A I’ve got about $175 million in cash [about 21% of the fund’s assets]. We’re facing the same problem as in early summer, with price-to-earnings ratios up there again. You see P-Es of 30 on stocks that have 20% growth rates. Too high.
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Q Do you have a valuation benchmark--a P-E guideline you won’t exceed when buying?
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A I don’t have an absolute benchmark. You may find a terrific company with great fundamentals and even if the price [is high], if you have faith in it you go with it.
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Q But there just aren’t too many of those out there now?
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A That’s right.
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Q How big a decline in tech-stock prices would you like to see to get you buying again? Ten percent? Twenty-five percent?
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A I’d say 25% would be about right. But it’s scary to think about what that would do to the major stock indexes.
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Q One of your biggest holdings has been computer services firm Electronic Data Systems, which got hammered last week after warning about slower growth ahead. Did you sell into that decline?
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A No, I held on. I think what EDS is really talking about is slower growth in the next three to six months. Then I think they should come back with more traditional growth rates. As for the stock, it’s a question of whether it’s going to be dead money for a while, and I think that may be the case.
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Q Where are the fund’s big sector bets today, besides computer services?
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A Communications is a big area for us. We think it’s an industry that’s going to carry us into the next century. So we’ve come back to stocks that we had avoided earlier in the year: cellular phone manufacturers, including Nokia and L.M. Ericsson. The oversupply situation [of early 1996] seems to be over, at least for them, though we think Motorola still has other problems, so we don’t own that one.
We also like some of the voice-technology and voice-systems companies, like Octel, Andrew Corp. and ADC Telecomm. Their growth rates are still spectacular, and we see great international opportunities.
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Q Do you own semiconductor stocks, outside of Intel?
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A I’m still a little concerned about the commodity-semiconductor companies. We took a swing at some of them earlier in the year. We bought Micron Technology, but it’s out of the fund now. I’m hearing that prices in the DRAM [dynamic random access memory chips] market are weakening again, so I think that’s an area we want to avoid.
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Q What about Internet-related stocks?
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A I played Netscape for a while, but the valuation got to be absurd. I still have to scratch my head wondering who the survivors [among Internet players] will be and how they’re going to make money. But Microsoft certainly is going to be there.
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Q Talk about a high valuation, though--at 39 times earnings, Microsoft isn’t exactly cheap!
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A Well, I think there’s more to come from them in 1997 [in terms of earnings gains]. And you just have to be in that stock. Microsoft and Intel are two of our biggest holdings.
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Q That sounds like the “one-decision-stock” mentality of 1972--the Nifty Fifty.
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A I think we are sort of at that point with those two stocks. I think they’ll probably be the last stocks to go out of people’s portfolios.
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Q What about IBM?
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A I don’t own it right now. I wasn’t exactly thrilled with the [third-quarter] earnings report. Also, frankly, we missed the upside. It’s already had a nice move this year.
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Q Looking at your portfolio today, you have a pretty broad definition of “technology.”
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A Yes, I’ve got a wide scope of stocks that I can buy for this fund, including biotech, robotics, medical technology, and 3-D seismic technology companies in the oil industry. I want to give the shareholders a broad-based portfolio of technology.
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Q How much attention do you pay to the movement of the stocks themselves versus the underlying prospects of the businesses--i.e., the technicals versus the fundamentals?
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A I spend a lot more time on the technicals in this kind of market environment. You want to stay away from stocks that can really hurt you. For me, the technicals are very important because the way a stock acts can be a warning flag that trouble is brewing.
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Q That makes you a “momentum” player, doesn’t it? I mean, you may be forced to sell a stock even if the fundamentals are fine but technically it’s acting poorly.
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A It makes me a momentum player to a certain extent, yes.
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Q Do you think 10 years of tech-stock investing has made you more conservative in terms of where you’re willing to invest?
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A Probably so. But high valuations on these stocks are the biggest problem area for me now. There’s a bad correction out there somewhere.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Invesco Strategic Technology
Category: Specialty stock: technology focus
Strategy: Seeks capital appreciation through investing mainly in companies that are in technology-related fields.
VITAL STATISTICS
Year to date total return: +19.8%
5-year total return: +191.4%
Avg. general stock fund 5-year return: +96.7%
Five biggest holdings as of Sept. 30:
1. Intel
2. Electronic Data Systems
3. Microsoft
4. Dell Computer
5. Computer Associates
Sales charge: None
Asset size: $840 million
Min. investment: $1,000
Phone: (800) 525-8085
Morningstar risk-adjusted performance rating, 1-5: *****
Sources: Lipper Analytical Services; Morningstar Inc.
