Fund Managers See Tech Pullback
“Scream 3”: the latest Hollywood thriller--and a good script for what’s about to play out in the technology stock sector?
Three well-known tech-stock mutual fund managers warned on Sunday that their highflying sector is poised for a significant pullback, after spectacular gains over the last six months.
And although investors have heard such warnings many times in recent months--even as tech stocks have continued to soar--the fund managers speaking at The Times’ fourth annual Investment Strategies Conference at the L.A. Convention Center left little doubt that they personally are planning for trouble.
“We aren’t buying anything right now . . . we are raising cash,” said Alberto Vilar, head of Amerindo Investment Advisors and manager of the Amerindo Technology Fund in New York.
“I am personally cautious right now on our universe [of stocks],” said Ron Elijah, head of Elijah Capital Management and manager of the RS Value + Growth and RS Information Age funds in San Francisco.
Vilar and Elijah joined Ken Pearlman, director of research at tech-fund boutique Firsthand Capital Management in Silicon Valley, on a panel focused on the general outlook for tech-stock investing in 2000.
It’s not much of an outlook in the short-term, they suggested--although, not surprisingly, all three were very bullish on tech for the long haul.
The problem now is that expectations may be ahead of reality for many stocks, and that share prices in general don’t allow any room for disappointment, the managers said.
Pearlman, a specialist in the semiconductor area, worries that the huge demand for computer chips in the last half of 1999--which helped fuel a doubling of many chip stocks just since October--may have produced a temporary inventory bubble that could weigh on chip companies’ sales and earnings early this year.
“Some of the semiconductor industry data [on demand] looks so incredible it’s probably too good to be true,” Pearlman said, meaning many of the ordered chips may still be sitting and waiting to be used in something.
He noted that chip-industry analysts had substantially overestimated 1998 sales, and underestimated 1999 sales--which shouldn’t give investors much comfort in trying to use currently bullish 2000 sales forecasts as justification for buying chip stocks now, he conceded.
Vilar reminded investors that many Internet-related stocks plunged as much as 50% from last April to August, as profit-taking slammed the stocks. He said a similar pullback could hit many tech stocks in coming months.
But get used to--and take advantage of--volatility, Vilar and the other managers advised.
The next major pullback in leading Internet-related stocks and other tech issues “could be one of the last great opportunities to buy for the next few years,” Vilar said.
He believes that the great tech-stock rally that began in October 1998 marked the recognition by many institutional investors that they owned far too few tech issues, given the growth potential of the sector over the coming decade. That “reallocation” of institutional money into technology issues is far from finished, Vilar insists.
A major problem for the tech sector in the short-term, however, is the Federal Reserve’s campaign to raise interest rates, Elijah said. “I do believe the economy is going to slow down” as rates rise, he said. “That’s going to take earnings away from some [companies],” most likely including tech companies.
But looking past whatever declines tech stocks may face in coming months, Elijah remains bullish long-term on such names as Texas Instruments (ticker symbol: TXN; Monday’s closing price: $134.63); Intel (INTC; $109.88); Qualcomm (QCOM; $127.13); and Cisco Systems (CSCO; $130.50).
Pearlman’s favorites include semiconductor-manufacturing-equipment maker Applied Materials (AMAT; $161.06) and chip makers PMC Sierra (PMCS; $130.13), which serves the Net infrastructure market; RF Micro Devices (RFMD; $102.13), a supplier to the wireless industry; and Zoran (ZRAN; $56.88), whose chips are used for digital audiovisual applications.
Vilar’s “core” tech stocks that he would want to buy more of if they fall sharply include business-to-business e-commerce facilitator Ariba (ARBA; $213.25), as well as Net infrastructure providers Akamai Technologies (AKAM; $230.38) and Sycamore Networks (SCMR; $109.38).
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Chip Stocks
Roar Ahead ...
Semiconductor stocks have been among the tech sector’s leaders over the last year, as demand for chips has boomed. Monthly closes and latest for the SOX index of 16 major chip stocks:
Monday close: 925.71
Source: Bloomberg News
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Despite weakness in Microsoft stock in recent weeks, the Goldman Sachs index of 26 software stocks has largely held on to its tremendous late-1999 gains. Monthly closes and latest:
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Monday close:
514.76
*
Source: Bloomberg News
