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Buy side banter
Want to know what a market bear, deep value lover and merger expert think about tech? Read on.
February 20, 2003: 2:49 PM EST
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) An intriguing group of mutual fund managers was set to speak to a crowd of business journalists in New York Tuesday, but that was before the blizzard of 2003.

Due to the storm of the century (the 21st century, that is), only a handful of brave journalists showed up. (Wimps!) Fortunately for you, I was one of those intrepid reporters who schlepped through the snow. So without further ado, here are some of the more interesting comments.

The bear necessities

David Tice, the famous (infamous?) short seller and manager of the short-heavy Prudent Bear fund, addressed the small congregation of reporters via telephone (he was unable to make it in from Dallas), and guess what? He still thinks that technology stocks have more room to fall.

"High tech remains a fertile ground for selling short today," Tice said. While he would not mention specific stocks that he is shorting, he did cite Intel (INTC: Research, Estimates), Oracle (ORCL: Research, Estimates) and Cisco Systems (CSCO: Research, Estimates) as techs that he believes are trading at unreasonably high valuations. Short sellers, who bet that stock prices will fall, try to profit by borrowing shares to sell and buying them back at lower prices, thus profiting on the price difference.

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Tice has been criticized in the past for being too much of a market ursine. And his fund, which has had annualized three-year returns of nearly 27 percent during the bear market, drastically underperformed the market during the latter 1990s.

But Tice may be worth paying attention to. He's been pretty prescient about specific companies, not just the overall direction of the market, during the past few years. To wit, he first started airing concerns about merger-related accounting problems at Tyco International (TYC: Research, Estimates) in October 1999, two-and-a-half years before the Dennis Kozlowski mess.

Buffett wannabe doesn't like tech either

The most legendary investor of our era is, of course, Warren Buffett. Sure, you could make a case for Peter Lynch, George Soros, John Bogle or maybe even Bill Miller. But I'm sticking with the Oracle of Omaha. And so is Ed Walczak, manager of the Vontobel U.S. Value fund.

Walczak, a self-described "Buffett wannabe," phoned in to talk about his investing strategy and explained why he doesn't like tech stocks. He also was unable to make it to New York City -- even though he's based there. (He was up in Connecticut helping his mom dig out her driveway ... what a nice young man!)

Somewhat surprisingly, valuation is not Walczak's biggest beef with tech. Nor does he claim to not understand them, as Buffett does. Simply put, Walczak said that most tech stocks, despite their earnings growth potential, just aren't able to consistently generate high enough levels of return on equity and free cash flow to satisfy a deep-value investor such as himself.

"Prices may have been exorbitant in 1999 but it was mostly the business models that scared me, that tech companies have to constantly reinvent themselves for the future," Walczak said.

For this reason, he's pretty much avoided tech stocks and continues to do so, even with the Nasdaq trading about 75 percent below its March 2000 peak. But a lack of tech exposure during the bull run hasn't hurt him. The fund has an impressive annualized 10-year return of 12.5 percent.

Merger mania? Not quite.

Finally there are some encouraging comments to report. John Orrico, manager of the Arbitrage Fund, a mutual fund that invests in announced takeover situations, thinks that the pace of technology company mergers will pick up in 2003.

Why? There are still too many companies chasing what's left of demand. And with the tech sector entering its fourth year of a bear market, smaller companies that want to survive will probably need to find a partner or risk going under. "That's how overcapacity in the technology sector is going to dissipate," said Orrico.

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But (you knew there was going to be a but, didn't you?) don't get too excited. Orrico said most deals are going to be either mid-sized companies in beaten-down industries pairing up, or tech titans making relatively small deals. In other words: no blockbusters and probably no huge takeover premiums either.

Orrico said the two areas of technology in most need of consolidation are software and telecom, and deal flow is starting to pick up somewhat in those areas. To that end, wireless equipment firm Andrew (ANDW: Research, Estimates) agreed to merge with Allen Telecom (ALN: Research, Estimates) Monday. And last year, IBM (IBM: Research, Estimates) agreed to acquire Rational Software (RATL: Research, Estimates). (The deal should close this quarter.)

Speaking of being a wimp ...

One last note. I was also supposed to attend a party Tuesday night that digital media software company Roxio (ROXI: Research, Estimates) was holding at a nightclub in Times Square to launch its latest CD and DVD burning products. But because of the snow (and the Siren-like allure of "American Idol"), I decided I'd rather go home early instead of hobnobbing with Bruce Hornsby, who performed at the party. Yes, I am a lamo. That's just the way it is.

But my colleague attended and wrote a nice analysis of Roxio's stock. The company, which acquired the tech assets of Napster in November, plans on launching a fee-based download site later this year. For more about Roxio, read "Napster rising from the grave."  Top of page

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