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Mutual Funds
Tech values no bargain
October 13, 2000: 6:07 a.m. ET

Northern's Gilbert shies away from decimated blue-chip tech stocks
By Staff Writer Mark McLaughlin
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NEW YORK (CNNfn) - A slew of earnings warnings have sent blue chip tech stocks tumbling to their lowest levels in a year -- making stocks such as Apple Computer, trading at nine times trailing earnings, so cheap as to seem irresistible. But Northern Technology Fund's George Gilbert knows better.

Recent corrections in the Nasdaq convinced Gilbert, the fund's co-manager, to scoop up battered shares of Electronic Data Systems (EDS: Research, Estimates) and Computer Associates (CA: Research, Estimates). Both companies had suffered through tough times but with low valuations and reliable past growth, he figured they were safe bets.

But EDS dropped a bomb this past spring when it said it would miss second and third-quarter earnings goals; Computer Associates soon followed suit with its own news of shortfalls.

The lesson: Having a low price-to-earnings (p/e) ratio doesn't mean a company won't disappoint.

The problems come, Gilbert said, when revenue and earnings growth slow. Companies often can't ratchet down spending fast enough to offset slowing growth, which can ignite a spiral of lowered expectations and performance, he added. For example, dismal growth in two units forced Lucent Technologies (LU: Research, Estimates), whose stock had already fallen more than 50 percent in 2000, to issue its third earnings warning of the year this week.

"When the wheels are coming off the bus no p/e is too low," Gilbert said.

graphicSlower growth may result from a market development such as the shift away from the PC that has tarnished Dell Computer (DELL: Research, Estimates), Apple, Intel (INTC: Research, Estimates) and Microsoft (MSFT: Research, Estimates). By Gilbert's estimate, that quartet now trades at an average of 25 times trailing earnings -- less than the 30 times earnings of the S&P 500.

Corporate spending has shifted away from the PC to communications networks and the Internet. And with companies replacing their PCs less frequently, Gilbert sees growth remaining sluggish. His Northern Technology fund abandoned the PC sector some time ago.

"The question is: do you want to own value instead of momentum?," Gilbert said. "Every now and then you do want to own value stocks in technology, every now and then value tech outperforms momentum." Momentum investing is based on the belief that once a stock starts rising it will continue to rise for an extended period.




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But given the choice in today's volatile market of buying a standby such as Apple at a discount or an emerging company such as Applied Micro Circuits (AMCC: Research, Estimates)s at a premium, Gilbert favors the more expensive stock with the better fundamentals.

While most of the tech blue chips are full of questions, Gilbert said Oracle (ORCL: Research, Estimates) stands out as a reasonably valued company with sustainable earnings growth. The tech correction has sliced shares of the database software maker by 32 percent and compressed its forward p/e ratio to 60, based on projected earnings of $1.05 per share in 2001.

Gilbert expects the company to grow earnings at an annual rate of 25 percent over the next five years as it continues to shift its software to the Internet, making it a buy at current levels.

Networking, storage, B2B look good


In addition to Oracle, now the fund's top holding, Gilbert has used the extended market dip to load up on stocks in sectors that continue to show strength: optical networking, data storage and business-to-business e-commerce.

Just this week he has added to positions in storage management software maker Veritas Software (VRTS: Research, Estimates), B2B software developers Ariba (ARBA: Research, Estimates) and i2 Technologies (ITWO: Research, Estimates), as well as software firms Siebel (SEBL: Research, Estimates) and BEA Systems (BEAS: Research, Estimates).

But even significant price drops leave most of these "new economy" stocks with valuations that are not meaningful, Gilbert said.

"The recent pullback makes them a little more palatable," he said. "To make values reasonable at current levels these companies would have to grow at startling rates. That's the conundrum in technology. You want to own tech for growth not value. If you have a turnaround, that would be ideal -- but generally speaking you want to buy for growth."

Fourth quarter favors tech


Like Gilbert, Derek Felske, manager of the Strong Technology 100 fund, is not jumping at the chance to own Dell and Intel at a discount. But he does advise that with the Nasdaq hovering at it lowest levels of the year, now is a good time to dollar cost average into the high-growth sectors such as fiber-optics, Internet infrastructure and B2B e-commerce or into a tech fund.

While the blue-chip techs may be in a bear market, he said more companies in his tech database beat earnings estimates last quarter than ever before and that such trends tend to persist. "You haven't heard [warnings] from any growthy stocks, it's all the old names," Felske said.

Felske also points out that the Nasdaq has outperformed the S&P 500 in the fourth quarter every year for the last ten years as companies squeeze in the bulk of their IT spending before year end.

"To buy some leading companies on this break, I think you're going to win," he said.

Leaders mentioned by Felske include Ariba, Oracle, Applied Micro Circuits, Commerce One (CMRC: Research, Estimates), Nortel Networks (NT: Research, Estimates), and PMC-Sierra (PMCS: Research, Estimates).

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.