What Tech Investors Need Now: Patience

How much weight should an investor give technology stocks in a portfolio? "As much as you have the nerve to hold," says Kevin Landis, chief investment officer of Firsthand Capital Management, which runs a variety of tech-stock funds. Landis points out that "if the average stock is very out of favor, tech stocks have been very, very out of favor."

For them to turn around, he says, it'll take time, patience, and improving fundamentals. Still, Landis sees a few opportunities in the form of the top stocks in three of his funds: Websense (WBSN) in the Firsthand e-Commerce Fund, PDF Solutions (PDFS) in the Technology Innovators Fund, and Sandisk (SNDK) in the Technology Value Fund.

Some tech companies Landis views more as blue chips now, notably Intel (INTC), Cisco (CSCO), and Microsoft (MSFT) -- solid stocks but no longer super growth stories but all holdings in the Firsthand Technology Leaders Fund. Another tech giant, Dell (DELL), he sees as more of a product company, and one he doesn't own.

These were some of the points Landis made in an investing chat presented Sept. 2 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.

Q: Kevin, what's your view of the broad market and its welcome surge today?

A: Well, despite today's uptick, the market still seems to be in an awfully pessimistic mood -- and still very much a glass half-empty.

Q: And how much weight should investors give the tech stocks you specialize in?

A: Well, as much as you have the nerve to hold. It's a way of saying that it's a very high-beta [a measure of stock-price volatility] group.

Q: Although it's in the dumps right now, do you see anything that will turn around Intel's (INTC) performance?

A: Intel's problem is that they've conquered their world, the PC market. To become a growth story again, they need to hang on to their preeminence at the center of the PC world and find new growth engines outside of it. They do seem to be having a tough time of it right now, but it's still a great franchise.

Q: Your opinions and stock evaluations for Cisco (CSCO)?

A: Cisco doesn't seem to be having as tough at time at the moment as Intel, but they both fall into the same broad category -- and that's a surviving tech blue chip. They need to be viewed as blue chips first and tech second. They've been successful in the past and have gotten so big that it would be hard for them to become sexy growth stories again. But as blue chips, they're pretty solid stories.

Q: Does that same analysis apply to Microsoft (MSFT) as well?

A: Absolutely, and what you'll see with each of these companies is a very solid, defensible core franchise, with strong efforts outside of that to build on that success. Sometimes they're successful. Sometimes they're like Michael Jordan trying to hit a curve ball. All three of these stocks are held in our Technology Leaders Portfolio (TLFQX), and we're happy to own them at these levels but aren't accumulating any of them presently.

Q: Is MSFT still a stock to own?

A: If you like stability, and you want exposure to software while retaining the ability to sleep through the night, sure. I'm pretty sure they're still planning on pushing most of that cash they have back out to shareholders, so it's a good stock to own, overall.

Q: Opinion on Yahoo! (YHOO)?

A: Yahoo is one of the better examples of a surviving Internet powerhouse. They've done a very good job in the last few years in translating traffic into cash flow. We see that as one of the stronger emerging e-commerce franchises. They could conceivably even compete with, say, Google (GOOG) on the search-engine side of things, but they don't need that to be successful. That's only one of the things that creates value and generates traffic.

Q: Aha, Google! What do you think of GOOG and its IPO, and are you buying?

A: Google's IPO was a great attempt to improve the process, and I really like the efforts that they made to democratize the process. It was great to see the VCs [venture capitalists] step back and wait to sell their shares, but I'm a little bit concerned about pressure on the stock, with employee lockups coming off so quickly. As for whether we're buyers, we're still waiting for our moment of opportunity.

Q: Is Dell (DELL) still a good buy?

A: We don't own Dell because we consider it more of a product company, not so much a technology company, but you have to admire their ability to execute. They're sort of the Wal-Mart (WMT) of the PC business.

Q: Do you look at IBM (IBM) as a product company, as you said about Dell? Do you see it as a buy?

A: I have to say there are many differences between the two companies -- one of which is that IBM has deep roots in technology. Their problem, historically, has been getting that product to market. They've been the company with better technology that keeps getting beaten to the punch by other tech companies. Unfortunately, they're also a big tech company and very much reliant on big-company IT spending.

Q: Back about five years ago, you really promoted Triquint Semiconductor (TQNT). What's your opinion now?

A: Triquint has an interesting portfolio of product lines. They've got very good exposure to military electronics, and they have purchased some interesting optical technology from Agere (AGRB). Their handset exposure makes me a little bit nervous, because price pressure there is crushing, but overall I think the company is still a fascinating little opportunity.

Q: What's your opinion of the wireless company Proxim (PROX)?

A: Proxim is definitely a turnaround story. The real question is whether their next generation of products is going to get any traction in the market, and I don't have that answer, so we don't own that stock. What's new in the next generation, by the way, is that the market for wireless infrastructure is suddenly sexy again, as Wi-Fi is built out. And you're also getting more than just the cell-phone companies purchasing products. There are lots of new customers that will buy radio products now.

Q: What, if anything, is going to lift Oracle (ORCL) out of the doldrums?

A: That's a very tough problem. They have a commanding position within the database market, but databases are the unsexy part of what is a very sick industry right now (enterprise computing). So Oracle needs enterprise software demand to pick up, and they need to have products that are higher growth than just databases. Right now that looks like a tall order.

Q: You noted that tech stocks have been more out of favor than the average stock. How have your funds been doing during this period?

A: Not surprisingly, we've taken it on the chin.

Q: How badly? Some funds worse than others?

A: Our funds do have different characteristics, but they're all tech funds. So as a group, they've underperformed the Nasdaq.

Q: What are your top three stocks for 2005? Are you buying anything now?

A: That's a pretty broad question there. Let me answer that question a little bit differently. I'll say it this way: The biggest position in the Firsthand e-Commerce Fund (TEFQX) is Websense (WBSN). The biggest position in our Technology Innovators Fund (TIFQX) is PDF Solutions (PDFS). The biggest position in our Technology Value Fund (TVFQX) is Sandisk (SNDK).

Websense is a software company that provides IT managers with the tools to regulate and monitor employee Internet usage, which keeps employees from getting you sued by going to inappropriate Web sites, helps keep productivity high, and overall gives managers access to information that ensures abuse isn't going on.... It's a great product, it's rapidly gaining popularity, and it has been growing for the last four years -- and is just now being noticed.

PDF Solutions offers tools and services to enhance production yields of advanced semiconductor products. That may sound dry, but there are big bucks on the line. It does no good to spend billions on a new chip factory with cutting-edge tech if the chips don't work. So their value-added is very real. They're a little company but can provide big benefit to anybody in the chip industry.

Sandisk is a little bit more well known than the other two -- they are the early leader and pioneer in flash-memory products. They make the kind of flash that's removable, not embedded, and that's the kind of flash the world is demanding more and more of. The market for flash has expanded from cameras to cell phones and USB drives. There are those who worry that flash will become a commodity product. I'd like to point out to them that oil's a commodity product, and it has done pretty well for people lately.

Q: What's your outlook for your e-commerce fund? And, for that matter, for e-commerce broadly?

A: The growth in e-commerce, like a lot of tech trends, is much more real than people have recently given it credit for. We've gone through the early hype, the bubble bursting, and now we're down to the companies that really have a rational business model and are the beneficiaries of a strong underlying trend that really is happening.

Almost any prediction made about the Internet in 1999 or 2000 is coming true -- it just took longer than people thought. The stocks in our e-commerce fund are positioned to do very well. The dot-com blowup has come and gone, and now we've got real businesses.

Q: In e-commerce, are you high on eBay (EBAY)?

A: eBay has clearly crossed over to blue-chip status. I think a lot of money managers outside of tech own it because they feel they have to. It's not GE (GE) yet, but it has really become a must-own stock for a lot of investors. As such, it's bound to be a fairly expensive stock. If you own it, you could sell it, because it's expensive.

Then again, I could have made that statement anytime over the last five years, and it would have been a bad trade to sell that stock anywhere along the line. They do seem to have a pretty tight grip on their particular kind of online marketplace, so I do think this optimism is warranted, for the most part.

Q: What are your thoughts about valuations of tech stocks now?

A: I think if you're following some of the more famous names -- Nortel (NT), Lucent (LU), Sun (SUNW), Oracle -- you'll hear people make the argument that they're still very expensive. That's true for a lot of established tech companies, but there are also quite a few up-and-coming growth stories that are relatively undervalued, and we think those are some of the best bargains going.

Q: What will it take for the tech sector to do better?

A: Time. Patience. And improving fundamentals.

Q: What are you watching on the frontiers of technology?

A: A lot of interesting possibilities are out there. If the price of oil stays high, alternative-energy technologies might actually go from promising "someday" stories to here and now. In particular, I think the LED will replace the lightbulb in the next few decades, and that will be a big energy saver. I also think that solar power might finally be ready for prime time. But there are, as always, lots of intriguing futuristic technologies being worked on.

Q: What are some of the investments that have been made for the Firsthand Global Technology Fund?

A: First of all, you can get a portfolio snapshot by visiting our Web site (firsthandfunds.com) for any of our funds. That said, some of the bigger positions in our Global Technology Fund include Alvarion (ALVR), UTStarcom (UTSI), Samsung, and Mercury Interactive (MERQ).

Q: How much weight would you give tech in a long-term portfolio now?

A: As much as you have the nerve to hold. Tech's about as out of favor as I've ever seen it, which probably means six months from now it'll still be out of favor. So you can make some great investments but won't get any positive reinforcement for them in the near term.

Q: So patience is the word! As you said earlier.

A: Patience, patience, patience -- absolutely.

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