Hitting the Jackpot An explosive stock like Qualcomm can make you a millionaire almost overnight. But can anyone predict what the next "it" stock will be?
(MONEY Magazine) – Rosario Maiolino gambled his savings on a single stock. One tiny, obscure tech stock that most people had never heard of. Over a few years, he plowed every spare dollar into that one company, until by late 1998 he'd bet a total of $325,000. Other than his house, it was his only major investment. Was this guy nuts? It certainly sounds insane--like some stock market version of extreme sports (kamikaze investing, anyone?). But the gamble paid off: Last year the company--digital wireless communications wonder Qualcomm (QCOM)--staged a breathtaking run, racing from $52 to $212, splitting two for one, then hitting $659. In all, it rose 2,619% in 12 giddy months, making it one of the greatest get-rich-quick stocks of our era.
Maiolino's windfall: $17 million. When the stock took off, "it was like a fairy tale come true," he says. Awash in money, the 48-year-old anesthetist gave up full-time work last spring. No wonder he calls himself a "Qualcomm evangelist" and drives a car with the license plate GO QCOM.
In every year of this raucous bull market, there seems to be one tech stock that captures investors' imaginations, reminding you how filthy rich investing can make you. In 1995 Iomega soared 1,396%. In 1997 Yahoo! rose 511%. In 1998 Amazon.com jumped 966%. Qualcomm is the latest marvel, and its mammoth gains came even faster than those of earlier "it" stocks. One minute, almost no one had heard of the company. The next, it was exploding onto everyone's radar screens.
How did Qualcomm get so hot? Can understanding its rise help us find the next "it" stock? Should we too have been able to spot Qualcomm--or was the good fortune of "Quillionaires" like Maiolino just a fluke, like buying a winning lottery ticket? Were we too cautious, uninformed or--dare we say it--rational to hit the jackpot? After all, if there's one thing the Qualcomm saga proves, it's this: In a market gone mad, prudence and rational thought can be costly.
A VERY SAVVY RABBI
like many early Qualcomm converts, Maiolino was an old-fashioned investor (he does research!) intrigued by a new-era stock. Granted, he didn't discover it by devising a rigorous stock screen. He heard about it from a plastic surgeon who--this is true--heard about it from an investment banker turned rabbi. The surgeon had ignored two land deals the rabbi had recommended, and had later seen the land sell for huge sums. So Maiolino and the surgeon decided to take the rabbi's next tip--Qualcomm--more seriously.
In a sense, then, Maiolino was plain lucky: He happened to have a connection to a very clued-in rabbi. But Maiolino boosted his odds by doing obsessive research. After Qualcomm went public in 1991, he scoured analyst reports, studied wireless journals, pored over his paper's employment section to see if competitors were hiring, even tested every generation of Qualcomm phone.
Maiolino's homework convinced him that Qualcomm's digital wireless technology--called CDMA or code division multiple access--was "an amazing revolution for cell phones." As Maiolino saw it, the San Diego-based company could reap spectacular profits if CDMA caught on: Any time a consumer bought a mobile phone that used Qualcomm's CDMA technology, it would pocket a royalty. The company could also sell masses of chips for CDMA phones. With wireless communications exploding, the potential was huge. But could Qualcomm make the technology work, and would the market embrace it? Nobody knew--just as nobody knew beforehand whether or not Amazon, Iomega or America Online would fulfill their promise.
In the mid-1990s, Maiolino hooked up with an online community of equally devout believers. One of them, appellate lawyer John Goren, even drove for hours to Marshall, Texas to observe a patent fight involving Qualcomm. He then shared his legal opinion on a Silicon Investor message board.
Another online Qualcomm devotee was Alan Militich of Jackson, Mich. Having run a Radio Shack store, he understood wireless phones and quickly grasped the potential of CDMA. "Whenever I tried to be a devil's advocate," he says, "I could never find a reason not to invest." As a result, he's about to move with his wife and kids to a new gated estate on 80 acres, where they can ponder the joys of investing beside their own lake.
In a way, this was classic buy-what-you-know Peter Lynch investing. Lots of regulars on Qualcomm message boards lived in San Diego and could follow the company through the local paper, or quiz neighbors and friends who worked at Qualcomm. Says founder and CEO Irwin Jacobs: "We used to joke that so many of our investors were in San Diego that if the stock went down we'd probably think twice about going out at night."
Still, the devotion of a small gang of well-informed enthusiasts wasn't what would propel Qualcomm into superstockdom. For that, it needed to enrapture fund managers with billions to invest. And that would require a confluence of events that even the most avid Qualcomm watcher could never have foreseen.
Trouble is, Wall Street didn't much like Qualcomm's business model. The firm had great patents and a promising line of chips. But it was also stuck in less sexy businesses, like building CDMA networks and making phone handsets. "Institutional investors and analysts were frustrated with us," says CFO Anthony Thornley. "They had difficulty understanding our strategy."
There were other problems too. Qualcomm, which suffered losses from 1988 through 1992, repeatedly delayed bringing its CDMA technology to market. Then, in 1996, Qualcomm was hit with a nasty patent suit by Ericsson, which favored a rival technology called TDMA. Bad press didn't help either: A scathing front-page article in the Wall Street Journal quoted a Stanford professor who said Qualcomm had "fundamental technical problems that they don't know how to solve." That year, the stock fell 7%. Qualcomm still looked like just another ill-fated, overhyped tech stock.
Only a few fund managers saw hints of promise. One was Chip Morris, hotshot manager of T. Rowe Price's Science & Technology fund, which owned Qualcomm from 1996 to 1998. He says he "strongly encouraged" the firm to sell its money-losing network division. The company balked and the stock foundered. So in the fall of 1998, Morris bailed. "It was extremely good analysis," he insists. But his impatience would cost him dearly: "I think about it all the time."
By late 1998 the stock was mired at $51. But Qualcomm finally announced plans to dump the network division, and the stock began to climb. Then, in a weirdly magical and utterly unexpected way, all of the pieces came together.
On March 25, 1999, Qualcomm announced that it had resolved its disputes with Ericsson. The two rivals would now enter into cross-licensing agreements, and Ericsson would buy Qualcomm's network division. Even better, the two agreed to support a single CDMA global standard for the next generation of wireless communications.
Blast-off. The next day 105 million Qualcomm shares traded hands--five times the usual volume. Within 48 hours, the stock had surged 28% to $98.
Thanks to the Ericsson settlement, "the institutions came in," says Qualcomm CEO Jacobs. "It got people to re-examine Qualcomm." Among this horde of new converts was Kevin Landis of the Firsthand Technology Leaders fund. He'd worried that powerful rivals might swipe Qualcomm's ideas. But the settlement suggested that it "was able to protect its intellectual property." So he waded in and now has 10% of his fund in Qualcomm.
Adding to its legitimacy, Qualcomm was then anointed as a member of the S&P 500 index in July. Now even stodgy index funds had to buy it. Back in 1993, only 33 mutual funds had owned the stock. By late 1999, over 400 funds owned it, from Putnam to American Century to Fidelity.
THE ANALYST AVALANCHE
Yet Qualcomm's elevation to the status of an "it" stock was incomplete. To enter that stratosphere it would need the help--or hype--of analysts, a group with unrivaled power to drive stocks into orbit.
In the early days analysts could afford to ignore Qualcomm. In 1992, only a handful followed it, and most of them worked for firms that earned fat fees for underwriting its IPO. By 1996, about a dozen analysts tracked it; today 26 cover it. "There's an avalanche effect that takes place among investors and analysts," says Landis. "At some point, if you're an analyst and you don't cover a certain stock, you're not credible."
With these boosters jumping on the bandwagon, the Qualcomm story spread to more and more investors. A stock frenzy feeds on itself: New investors bid up the shares even further, making the analysts look like heroes. Everyone is happy--so long as the stock keeps flying. One analyst who savored this thrilling ride was Mark Roberts of First Union Securities, whose office is decorated with pictures of clients' new cars (license plate: CDMA) and boats (Sea Dee Mae). Says Roberts: "I have one institutional client who says that if I never make him money again, he still owes me."
At a certain point in the history of any "it" stock, the scent of easy money becomes irresistible. So many people are raking it in that everyone wants to get in on the game. One analyst who'd missed out on the Qualcomm party was PaineWebber's Walter Piecyk. Last Dec. 29, the 28-year-old finally initiated coverage. Sadly, the stock had already hit $500 by then. That day, though, Piecyk grabbed the spotlight by setting a 12-month target of $1,000. Investors went berserk, driving the stock up 31% in hours--based on a call by a guy who'd failed to pick Qualcomm before it jumped 2,000%. (The stock split four for one on Dec. 31.)
Thanks to Piecyk, everyone was making a killing. But how was he coming up with his numbers? Most analysts struggle to project even a few quarters ahead. Yet Piecyk felt comfortable forecasting Qualcomm's royalties for the year 2010. He then used that pie-in-the-sky figure to justify his target price. "The market isn't buying the stock based on how many chips Qualcomm sells," he argues. "After the Ericsson settlement, the stock started trading on vision. We were just codifying that vision in numbers."
Piecyk's brazen call immediately catapulted him onto TV networks and into newspapers. "It was a brilliant marketing move on his part," says Alex Cena, Salomon Smith Barney's longtime Qualcomm analyst. Roberts, another Qualcomm vet, marvels: "Walt will make a name for himself by saying he loves Qualcomm more than anybody."
"I AM A GENIUS"
When an "it" stock really goes ballistic, conventional analysis becomes pointless. It's all about momentum. Buy first, think later. At this stage, folks like Maiolino seem quaintly old-fashioned. Why bother with research now? This thing's a rocket!
As the momentum maniacs piled in after Piecyk's call, Internet message boards were swamped with sophomoric posts, often fixated on hourly price fluctuations. On the day of Piecyk's call, 3,034 posts poured into Yahoo!'s Qualcomm message board. Old-timers bemoaned the "RIP factor"--the low ratio of intelligent posts. Intoxicated with profits, one gleeful investor crowed, "I AM A GENIUS." A fellow philosopher contributed this pithy and profound insight: "1000 yea baby yea."
When stock analysis descends to this level, it's fair to assume the end is nigh. Most of Qualcomm's new cheerleaders seemed blissfully unaware, though, of how fleeting their wealth might be--until January, when the stock plunged 37% because of fears that growth might slow.
As for Maiolino, he had the sense to sell a quarter of his Qualcomm stake before the bubble burst. He stashed the proceeds in four bond funds that shower him with $21,000 a month in interest. Still, he refuses to abandon the stock. "I always want a portion of my portfolio in Qualcomm," he vows. And, really, who can blame him?