Some Managers See Bargains in Tech

Is it time to buy beaten-down technology stocks?

Some money managers say it is--and they’re backing up that view by putting cash to work.

The buyers include not only tech-focused funds, but also some classic general “value” funds that have typically shunned highflying tech issues.

“There are fantastic bargains out there in tech as well as the old economy. It’s like ’74 and ’82 all over again,” said veteran manager Marty Whitman, whose Third Avenue Value fund zoomed 19.7% in the first nine months of this year.

The tech-dominated Nasdaq composite index is down 21% since Sept. 1 and nearing the low reached in late May after the spring crash.

On Monday, the Nasdaq dived as low as 3,233 early in the day, leaving it just 2% above the May low of 3,164. But an afternoon rally drove the index back up to end at 3,355.56, off just 5.45 points for the day.

Whether Monday marked the last of the selling in this latest tech down wave remains to be seen. But fund managers like Whitman say they aren’t waiting for the possibility of cheaper prices.

He said he has been adding to positions the fund owns in such stocks as electronics-components maker AVX (ticker symbol: AVX; Monday close: $26.19); laser-systems maker Electro Scientific Industries (ESIO, $35.50); semiconductor manufacturing equipment maker GaSonics (GSNX, $12.25) and biotech researcher Kendle (KNDL, $8.63).

Another value-oriented stock investor, John Spears, managing director of Tweedy, Browne Co., said tech and telecom names have been popping up more often lately on the computer screens the firm uses to begin its stock-prospecting process.

Tweedy, whose American Value and Global Value funds both posted sharp gains through the first three quarters, screens for stocks with low price-to-book-value ratios, low price-to-earnings ratios or strong recent insider buying, among other criteria.

“In the telecom area, we’ve added to our holdings in RCN Corp. [RCNC, $15.31], which insiders have been buying” as well, Spears said. RCN is a fiber-optic-network telecom firm whose shares hit $74 early in the year.

Fund managers said the selling in tech lately has been exacerbated by tax-related moves by some mutual funds. Their fiscal years effectively end Oct. 31, so some of the funds are taking losses in pummeled stocks to offset capital gains realized earlier in the year.

“This is the time of year for bargain-hunting, as the weak stocks get weaker,” said Buzz Zaino, manager of Royce Opportunity, a small-value-stock fund that soared 27.3% in the first three quarters.

It has helped Zaino that individual investors are pouring money into his fund, attracted by its gain this year and by a new appreciation for value stocks.

“People have been burned with very expensive high-growth stocks, and they’re now looking for more balance in their portfolios,” Zaino said. “Cash has been flowing in every day since early in the summer and it continues,” he said.

Zaino has put some of that cash to work in information-technology service stocks.

“The cheapest group seems to be the IT service companies,” he said. “They suffered last year as projects were delayed because of Y2K, and expectations of a recovery this year have not happened. So it’s fertile ground for a value manager. The stocks may be suffering from malaise, wallowing in a narrow range, but that doesn’t mean the companies aren’t any good.”

Information technology stocks he has bought recently include Computer Horizons (CHRZ, $4.13) and MSC.Software (MNS, $9.29).

The higher-octane, tech-focused Pimco Innovation fund has also continued to take in new money since the spring tech sell-off, said manager Dennis McKechnie.

“Investors seem to have gotten the idea of buy low and sell high,” he said. “That’s been comforting.”

Through Friday, Pimco Innovation was up 8.2% year-to-date, versus a loss of 7.4% for the average tech and communications fund, according to Morningstar Inc.

McKechnie said he has been unloading tech stocks in more cyclical areas such as personal computers, semiconductors and cell phones and buying software and networking stocks such as Phone.com (PHCM, $107.88), I2 Technologies (ITWO, $173) and Ariba (ARBA, $122.69).

“These are strong businesses and are the real beneficiaries of the other half of tech--what I call the hard side--being weak,” he said.

McKechnie said he also has been buying consumer-related companies such as Gemstar-TV Guide (GMST, $78.38) and Palm (PALM, $43.81).

“These are important new products, but they’re not cyclical, not mature. It’s still early in their evolution.”

But McKechnie, who said he dumped chip maker Micron Technology (MU, $39.75)--his biggest holding as of June 30--at around $80, added, “This shift [away from cyclical techs] is not permanent. There will come a time when we will be buying the cyclicals again.”

At Invesco Telecommunications fund, which rose 7.6% in the first three quarters, assistant portfolio manager Donna Jaegers said she and lead manager Brian Hayward have been finding bargains among the Baby Bells.

“We bought BellSouth [BLS, $42.56] for the first time in a year about a month ago, and we’ve been adding to our holdings in SBC Communications [SBC, $52.44],” she said.

Jaegers said the fund is looking for companies with a growth catalyst--not just cheap stocks.

“We met with BellSouth management and figured out they weren’t going to do anything stupid strategically, like make an offer for Sprint, as some people thought,” she said. “The company also has momentum in its DSL business and plans a tracking stock for its Latin American cellular business.”

She called Pacific Bell parent SBC, which recently unveiled a mobile-phone venture with BellSouth, “a well-managed company whose earnings will pick up in ’01.”

Times staff writer Josh Friedman can be reached at josh.friedman@latimes.com.

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Tech Stock Funds: How Bad?

Here’s a look at how major technology-sector stock mutual funds have fared since the end of August, when the tech sector began its latest slide. Also shown are returns year to date and three-year annualized returns. All data are through Friday. Generally, Internet-focused funds have fared worst over the last month. The biggest gainer since late August-the Potomac Internet Short fund-is a fund that “shorts” Net stocks, meaning it bets against the stocks. Investors who think the tech sector is nearing a low, and who are tempted to buy a tech fund to play a rebound, should be careful about potential capital-gains distributions by the funds. Before you invest, ask the fund if it plans a capital gains payment between now and year’s end. Such payments can produce instant tax liabilities for new investors to the funds.

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Fund name Since 8/31 YTD 3 years Potomac Internet/Short 25.5% NA NA Kinetics Internet New Paradigm -0.7 -8.7% NA Icon Information Technology -6.5 10.6 34.6% Waddell & Reed Adv. Science & Tech A -7.3 -4.1 42.9 Monterey Murphy New World Tech Conv. -8.4 3.0 8.6 W&R; Science & Technology C -8.9 -19.3 44.9 BlackRock Global Science & Tech Instl. -9.3 NA NA Alleghany/Veredus SciTech -10.2 NA NA Kinetics Internet Infrastructure -11.2 -29.5 NA Fidelity Select Software & Computer -12.3 -1.3 36.5 PIMCO Innovation A -12.6 8.2 58.7 Dresdner RCM Global Technology I -12.7 21.0 71.2 Light Revolution -13.1 -1.3 NA Kinetics Internet Global Growth -13.2 -24.6 NA Strong Internet -13.2 -5.0 NA Neuberger Berman Technology -13.6 NA NA MFS Technology A -14.0 12.7 34.4 STI Classic E-Commerce Opportunity -14.2 3.9 NA Firsthand Technology Value -14.2 24.4 51.8 Berger Information Technology Inv. -14.3 -0.7 59.0 INVESCO Technology Inv. -14.4 12.0 44.3 USAA Science & Technology -14.5 6.0 26.2 PIMCO Global Innovation A -14.8 89.5 NA Lexington Global Technology -14.8 -16.3 NA Van Kampen Technology A -14.8 11.7 NA Duncan-Hurst Technology R -14.8 NA NA Kinetics Internet -15.0 -38.5 76.4 Franklin Technology A -15.1 NA NA MSDW Information B -15.2 3.2 55.1 Delaware Technology and Innovation A -15.3 13.5 NA Van Wagoner Technology -15.5 13.9 NA ING Global Information Technology A -15.6 2.3 NA Firsthand Technology Leaders -15.9 8.9 NA Enterprise International Internet A -16.0 NA NA AXP Innovations A -16.0 NA NA Northern Technology -16.1 0.7 53.8 Orbitex Info-Tech & Communications A -16.3 5.1 NA Principal Preserv. PSE Tech 100 Index A -16.4 -0.2 40.3 Kemper Technology A -16.5 3.2 38.7 AIM Global Telecom and Technology A -16.6 -8.5 24.0 Nicholas-Applegate Global Technology I -16.6 -0.3 NA Firstar Stellar Science & Technology B -16.8 10.6 NA Matthews Asian Technology I -16.9 -37.9 NA Kinetics Internet Emerging Growth -17.0 -44.4 NA Janus Global Technology -17.0 -6.2 NA Scudder Technology -17.1 13.7 NA Enterprise Internet A -17.2 -16.7 NA Westcott Nothing But Net A -17.3 -45.7 NA Emerald Technology A -17.5 -14.8 NA Goldman Sachs Internet Tollkeeper A -17.6 -15.1 NA Merrill Lynch Global Technology A -17.7 -0.8 NA Red Oak Technology Select -17.7 48.5 NA T. Rowe Price Science & Technology -17.7 -9.1 29.9 PBHG Global Tech & Communications -17.8 NA NA Munder International NetNet A -17.8 NA NA Strong Technology 100 -18.2 7.8 NA Dreyfus Premier Technology Growth A -18.4 3.5 NA John Hancock Technology A -18.5 -9.8 37.1 E-Trade E-Commerce Index -18.5 -11.5 NA Merrill Lynch Internet Strategies A -18.6 NA NA PaineWebber Enhanced Nasdaq 100 A -18.7 NA NA RS Internet Age -18.8 -23.4 NA Alliance Technology A -18.9 -2.0 30.6 Heritage Technology A -19.1 0.3 NA Prudential Technology A -19.1 -6.5 NA WWW Internet -19.2 -26.9 40.5 Ivy Global Science & Technology A -19.2 -9.1 33.5 Security Technology A -19.6 NA NA Guinness Flight Internet.com Index -19.7 -22.3 NA MSDW Instl. Technology A -19.9 8.0 55.1 One Group Technology A -20.0 NA NA IDEX Pilgrim Baxter Technology A -20.0 NA NA Seligman Global Technology A -20.0 -14.0 25.6 Fidelity Select Technology -20.2 -2.1 45.6 Monument Internet A -20.3 -35.8 NA PBHG Technology & Communications -20.5 -1.3 51.3 Amerindo Internet B2B A -20.5 NA NA RS Information Age -20.6 -8.5 34 Fidelity Advisor Technology A -20.6 -10.5 30.5 Fidelity Select Computers -20.8 1.3 36.9 E-Trade Technology Index -21.3 -10.6 NA First American Technology A -21.3 -11.2 43.2 Rydex Technology Inv. -21.4 -15.4 NA Munder Future Technology A -21.5 -1.5 NA Schwab Technology Focus -21.5 NA NA Turner Technology Instl. -21.9 20.5 NA Munder NetNet A -22.1 -23.7 58.0 Firsthand Technology Innovators -22.6 -0.5 NA Seligman Communications & Info. A -22.9 -19.1 16.6 Firsthand e-Commerce -23.5 -29.5 NA Evergreen Technology A -24.0 NA NA Rydex Internet Adv. -24.2 NA NA Fidelity Select Electronics -24.4 12.2 38.9 StockJungle.com Pure Play Internet -24.4 -43.4 NA Internet Index -25.0 NA NA Amerindo Technology D -25.8 -37.1 53.6 Pioneer Science and Technology A -26.4 NA NA Monterey Murphy New World Technology -27.0 -33.6 -4.5 ING Internet A -27.1 -44.9 NA Jacob Internet -27.6 -60.3 NA Average -16.6 -7.4 38.0

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NA = not available (fund did not exist for entire period)

Source: Morningstar, Inc.