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Here's a portfolio of 12 stocks playing in six potentially hot sectors. Check out the portfolio's performance.
Saturday, August 19, 2000
So what now? With fibre-optic stocks apparently off the boil, maybe it's time to start hunting for the Next Big Thing. After all, the rewards can be rich.
Once investors take a liking to a sector, the gains can come fast and hard, as history has shown.
Back in the 1990s, when personal computer makers were hot, Dell Computer Corp. (DELL-Q | News) shares soared fivefold to $50 (U.S.) from late 1997 to early 1999. They've since slipped to $39.
When Internet retailers were in vogue in early 1999, Amazon.com Inc. (AMZN-Q | News) got to $86 — up from a split-adjusted $5 the previous year. The stock has since dropped back to around $38.
JDS Uniphase Corp. (JDU-T | News) hit $131 this February, up 10-fold in a year, as investors jumped on firms that sell the new fibre-optic communication equipment. JDS traded this week at about $120.
Mind you, investors have thoroughly picked over new industries in search of big winners. So don't expect to stumble across a future Microsoft Corp. (MSFT-Q | News) trading for pennies.
"It's hard to find anything that's really cheap and new," sighs Glenn Paradis, manager of the $571-million (Canadian) Transamerica Growsafe Canadian Equity Fund.
But stocks that have already risen a lot can go right on ascending if investors decide the industry promises huge expansion. Fibre-optic darling Nortel Networks Corp. (NT-T | News) traded at the equivalent of $37 in late 1999, up a dizzying threefold in a year. But the shares have since risen threefold again, hitting $120.
We surveyed six portfolio managers to see which sectors they think have a good chance of turning sweet. This is not investing for the nervous: Most of these shares have already gone up like rockets, which means many of the experts' picks are already trading at price-earnings multiples in the hundreds. And a lot of these stocks have already slid from their highs, meaning that investors have been badly bitten. But all of these industries offer companies with dizzying growth prospects.
In bed together
Business-to-business exchanges or "e-marketplaces" on the Internet are already beginning to drop like flies. A high profile casualty this summer was M-Xchange of Detroit, set up to help auto giants and other manufacturers buy supplies from minority-owned companies. Investors included politician Jesse Jackson. The site was closed down in July after its backers couldn't figure out how to generate revenue.
But observers reckon a few dominant exchanges will emerge and they will revolutionize many areas of business. "It's an emerging source of efficiency in the world economy," says Walter Price of Dresdner RCM Global Investors in San Francisco and co-manager of the $50-million Guardian Global Technology Fund.
He figures investors are likely to pay high prices for companies that provide the software for building exchanges — which will be structures that go far beyond bringing buyers and sellers together. For example, Mr. Price says, exchanges may ultimately warn subcontractors of falling demand for a product for which they supply parts. "If a certain model of switch from Nortel [Networks Corp.], or a certain model of car from Ford [Motor Co.] isn't selling well, that information is immediately transmitted to all the suppliers."
His B2B picks include two smaller stocks: Agile Software Corp. (AGIL-Q | News) of San Jose, which had a $2.6-billion (U.S.) market capitalization this week, and Interwoven Inc. (IWOV-Q | News) of Sunnyvale, Calif., with a $3.8-billion market cap. Agile Software's Agile Anywhere and Agile Buyer software lets electronics companies such as Hewlett-Packard Co. and Texas Instruments Inc. connect their production operations to their suppliers in an intimate liaison. "So if Celestica is manufacturing your printed circuit board and you're Nortel, the engineers can communicate with each other and reduce the design time," Mr. Price says. "It's a service that you will find inside of an exchange."
Agile went public at the equivalent of $10.50 a year ago. The stock hit $112 last December but it has since slumped to around $57.
Mr. Price also likes the prospects of Interwoven, whose software manages the content of Web sites. Its products are particularly strong "where you have multiple kinds of content . . . including audio content and media content," he says.
Interwoven went public a year ago at the equivalent of $8.50 a share. It reached $100 in March but traded at abount $76 this week.
The company delighted investors in July with a deal to provide the management software for the American Airlines Web site at http://www.AA.com . The company's TeamSite software will run the new RetailersMarketExchange, an exchange site for convenience stores.
Can we talk?
Tried using one of the infuriatingly slow "wireless access protocol" cellphones — known as WAP phones — that connect to the Internet? End up throwing it at a wall?
The technology is "garbage," snarls Rick Serafini, manager of the $1.2-billion Trimark Discovery Fund. The phones download Internet content sluggishly and they make it almost impossible to surf the Net, he says.
Urgently required: Software that solves the tangled conundrum of getting computers and other assorted gizmos to co-operate properly with each other.
"The market is looking for a fast, effective means of communicating corporate and personal information on all devices," Mr. Serafini says. "We don't currently have that and how it'll be solved is through middleware."
Definitions of middleware vary but the term traditionally denoted the boring programming code that connects a computer's operating system to the applications that it runs, such as electronic messages. However, middleware is emerging as the crucial glue that links a company's computer system to the Web.
Don't count out Microsoft (MSFT-Q | News) of Redmond, Wash., as a major participant in this exploding area, Mr. Serafini says. "Microsoft will definitely benefit."
The software giant has a lock on computing in the world's homes and offices but it has so far failed to take control of the Internet. However, the company is aggressively invading the Web by launching a new generation of software it calls "Microsoft .NET," usually referred to simply as "dot-net," which is intended to let its programs such as Office run on all manner of devices.
Hammered by fears that Microsoft will be broken up by U.S. competition cops, the company's shares have slid to around $71 (U.S.) on the Nasdaq Stock Market from $119 at the end of last year.
But Mr. Serafini reckons that Microsoft's dot-net initiative means the company is still very much a force. "This is how they're moving from a desktop operating system to a Web or Net-based operating system."
The urgent need for companies to connect with each other over the Web will also mean a flood of business for middleware producers such as Tibco Software Inc. (TIBX-Q | News) of Palo Alto, Calif., Mr. Serafini reckons.
Tibco, which originally automated investing information, was spun off as a public company by British information group Reuters Group PLC just over a year ago. Originally issued at the equivalent of $5, Tibco stock soared to $147 this March but has since dropped to about $97.
A safer way to play Tibco could be buying Reuters itself. The information giant still owns two-thirds of Tibco.
Using the map
This year saw the landmark "mapping" of the human gene structure, a piece of DNA with three billion chemical parts that spells out the code for a human being.
Scientists have now built a huge database of all of the human gene sequences.
But it was like doing a kiddies' jigsaw, compared with the next massive task facing researchers: Figuring out which proteins are in which cells and how they work together.
Proteins, which the gene blueprint generates, are the body's workhorses, used to build and maintain tissue. The proteome is the complete set of proteins produced by a cell during its lifetime and the study of proteins is called proteomics. Figuring out which protein does what job is essential before genetic data can be used to produce new drugs.
Companies active in proteomics are already catching the attention of investors, according to Mark Rarog, who manages $960-million in the two Investors Canadian Small Cap Funds. "That's really the next stage," he says. "Okay, we've mapped it out. Now let's take this information and link it to some kind of drug or some type of protein."
Shares in MDS Inc. (MDS-T | News) of Toronto and Theratechnologies Inc. (TH-T | News) of Saint-Laurent, Que., two Canadian medical-technology companies, have soared this year, lifted by the prospects of their proteomics subsidiaries. But both are active in several other areas of health care, which makes their stock potentially less risky than pure proteomics plays.
As of this week, MDS shares had jumped 77 per cent to around $53 in 2000 while Theratechnologies was up 174 per cent at about $13.
In an already-euphoric market for proteomics stocks, both companies are expected to spin off their subsidiaries on the stock market in coming months.
In April, MDS sold $82.5-million of MDS Proteomics Inc. shares in a private deal, saying the placement valued its unit at $600-million.
"MDS is going to do very well by this," Mr. Rarog predicts. "MDS Proteomics has excellent technology [and] they've been in this game a long time. It'll be one of the gorillas, one of the top three or top five companies in that space."
Theratechnologies' subsidiary, Ecopia BioSciences Inc., raised $21-million privately this summer. Ecopia specializes in studying the genes of micro-organisms that naturally produce beneficial molecules, many of which can be developed into drugs.
Ecopia "is in the early lead for [processes] used to analyze proteins," Mr. Rarog said.
Totally wired
Forget fibre optics. The next round of investor frenzy may well be for communications networks that use good old copper wire. The new pipes are known as "gigabit Ethernet" because they can carry data at one-billion bits a second.
Ethernet is an antique computer technology that has been souped up so that it now can spread out of the office block and throughout cities. The newest version is 10 times faster than the old "Fast Ethernet."
To cite John Markoff of The New York Times, "this is not your father's Ethernet; it is Ethernet 3,000 times as fast as the original versions."
Fibre-optic cable is a difficult beast to hook up to other equipment, which means tech-room managers are delighted to use the familiar copper links instead. Best of all, copper's cheap. "Gigabit-certified copper cable should have less than half the installation cost [of] traditional multimode fibre," trade sheet Computer Telephony mused in April.
The gigabit networks will thrive, says Ian Ainsworth, manager of the $1.8-billion Altamira Equity Fund, although he cautions that "it's not nearly as big as fibre optics."
Mr. Ainsworth reckons that business looks good for two leading makers of gigabit Ethernet switches: Foundry Networks Inc. (FDRY-Q | News) of San Jose and Extreme Networks Inc. (EXTR-Q | News) of Santa Clara, Calif.
Foundry's latest product name is "BigIron" while Extreme is more lyrical, with "Alpine."
Foundry changed hands this week at under $88 (U.S.), down from $212 in March but up from its $12.50 initial public offering price in September. Extreme shares, which will split two for one this month, touched a 52-week high of $190.87 this week. The company went public at $17 in April, 1999.
The big players
Internet retailers may be dying off in droves but companies of all sorts are still frantically building bridges with their customers over the Web, says John Leo, senior vice-president at Northern Trust Global Advisors in Chicago and co-manager of the $14-million Clarington Technology Fund. And in their nervousness, many will pick the largest and most familiar software partners.
To get big on the Web, businesses need truckloads of special software to construct Internet commerce sites. That means producers of software for e-commerce will demonstrate accelerating growth, the very thing that investors drool over, Mr. Leo reckons. "There's the potential for them to show increasing pace of growth over the next several quarters."
Like Dresdner's Mr. Price, Mr. Leo is keen on companies that write software for business-to-business sites. But he has a particular fondness for some big e-commerce software producers that are "providers of top-of-the-line solutions."
Two large companies with a great chance of becoming even bigger market darlings are Ariba Inc. (ARBA-Q | News) of Mountain View, Calif., which has a market cap of $33.7-billion (U.S.), and BEA Systems Inc. (BEAS-Q | News) of San Jose, with a market cap of $24.4-billion, Mr. Leo predicts.
To be sure, both stocks have already had an insanely great run. Ariba, which went public at the equivalent of $5.75 last year, traded at more than $140 this week. Its stock is not far off the $183 record high reached in March. BEA, which fetched almost $58 this week, went public centuries ago in 1997 at $1.50.
But there's plenty of time to get into e-business software stocks, Mr. Leo says. "We're still in the very early innings."
And investors are still willing to pile into both companies when they hear good news. Ariba, which specializes in software for business-to-business Internet sites on which companies buy and sell to each other, jumped 18 per cent in July. It was powered by news that revenue in the company's latest quarter soared eightfold to $80.7-million.
"We just expect that results in the upcoming quarters will be even more amazing," Mr. Leo says.
Shares in BEA, whose software lets Web sites handle financial transactions such as billing and money transfers, jumped more than 16 per cent Wednesday after the company reported that sales in its latest three months almost doubled to $186-million. "We are becoming the operating system for e-commerce," chairman, founder and chief executive officer Bill Coleman trumpeted to CNN.
Talk is cheap
Late last month, in a deal that attracted scant attention, communications network behemoth Cisco Systems Inc. (CSCO-Q | News) of San Jose took over privately held Komodo Technology of Los Gatos, Calif., for $175-million (U.S.).
It was just the latest in Cisco's long trail of acquisitions, but it points to the rise of a new industry that may make investors rich, Transamerica's Mr. Paradis says.
Komodo is a top developer of Voice-over Internet protocol (or VoIP) devices that allow phone calls over Internet-based networks. Once the quality problems are solved, voice-over IP could slash the cost of international calls.
But money managers are also excited about the technology because it will ultimately help create all-in-one services that carry voice, video and data over the Web.
Cisco (market cap $445-billion) has seen its stock slip to less than $64 from a high of $82 in late March. Mr. Paradis thinks the company is a great way to play voice-over IP.
And the software empire is also making strides in integrating voice into its Internet services, Mr. Paradis says.
He believes big tech names are leading the way in voice-over IP. However, investors with an appetite for a bit more risk might want to take a look at Mitel Corp. (MLT-T | News) of Ottawa, a maker of communications equipment and specialized microchips that is emerging as a sturdy player in VoIP. Mitel stock traded at about $32 (Canadian) this week, down from $48 in March but well up from $10 last September.
The company is making steady inroads into the U.S. market for voice-over systems. Last month, it said Michigan Technological University will use its advanced VoIP system, (Ipera 2000). And in April, the company said Cisco would use two of its integrated circuits to combine voice and data in emerging products.
So there you have it: Six sectors that could be the next big thing (in some cases, for a second time). Expect a wild ride if you buy any of these tickets. But if the bus gets crowded with other investors trying to jump aboard later, you'll be bound for glory.
On August 17, 2000, we hypothetically bought equal weights of each stock and will track the portfolio's
fortunes over the coming months. Click here to see how the portfolio is performing.
