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January 9, 2006 |
By Mark Evans
WHEN IAN AINSWORTH, A FUND MANAGER WITH MACKENZIE FINANCIAL CORP., assesses the high-tech investment landscape, he sees opportunities across a variety of sectors.
And his advice to would-be investors? Be realistic when contemplating high-tech companies that merit attention.
In many respects, the high-tech investment environment has become a story-by-story situation where a small handful of companies shine in each sector.
This is in sharp contrast to the late 1990s, during the dot-com and telecom booms, when the rising tide raised all ships. Whether it was Internet companies such as eBay or telecom equipment makers such as Cisco Systems and Nortel Networks, many investors enjoyed strong returns.
Today, it’s a far different world. The bursting of the dot-com bubble four years ago has not left the memories of many investors, who are still skittish about high-tech stocks.
Google may be one of the few exceptions to the rule but there were many institutional investors who balked at the search engine giant’s US $85-a-share initial public offering — something they rue today given it has climbed more than four-fold.
“I think, generally, people are still remembering the late-1990s and they are still cautious about the volatility in the group,” said Ainsworth, who manages several Mackenzie funds, including the Universal Future Fund and the Universal Emerging Technologies Capital Class Fund. “There is still risk
there. There tends to be a real rush into the group but the real money holds back to see if there is fundamental change.”
Still, there are opportunities in the high-tech sector for investors willing to do their homework.
Ainsworth said his investment philosophy has been straightforward: stick with high-quality companies with good fundamentals.
“We just buy better companies and try to not get carried away or too excited when stocks go and people think they are going to take over the world,” he said.
“We try to buy into product cycles that make sense and look to keep our portfolio diversified.”
Ainsworth said savvy investors can find good value among tech stocks that are trading at good valuations. Among these are Microsoft and Cisco.
As for which high-tech sectors are hot, the most fertile areas appear to be wireless, storage, semiconductors, online advertising and Apple Computer, which deserves its profile based on the spectacular success of the iPod.
It should be emphasized, however, there is not a deep pool of attractive companies in each sector.
Instead, each market has a handful of companies that rise above the competition because of sales momentum, new product cycles or valuations.
Wireless
Adam Adamou, an analyst with Northern Securities, perhaps understates the situation when he describes the wireless sector as “exciting for a lot of investors for a variety of reasons.” These reasons may be the growing popularity of mobile e-mail, climbing sales of RIM BlackBerrys and Palm Treos, or record sales of cellphones. R egardless of the criteria used, there is little doubt the wireless sector is one of the hottest markets.
For investors with more of an appetite for risk, Research in Motion is a worthy candidate.
For people bullish on the growth of mobile e-mail, the BlackBerry continues to be the device of choice for C-level executives and, increasingly, on-the-go professionals and consumers. This is despite inroads made by rivals such as Nokia Oyj, Palm and Microsoft.
The downside for investors is the lengthy patent fight between RIM and NTP. This has created a lot of uncertainly about how much RIM will need to pay to settle the dispute — estimates range as high as US $1 billion — and raises the possibility a U .S. court could impose an injunction that would stop the sale and service of BlackBerrys in the U.S.
In the carrier market, two attractive investment options are Telus and Rogers Communications because each generate more than 50 per cent of their revenue from wireless, a market with room for growth.
On the handset side, worldwide sales boomed in 2005 to about 810 million units amid demand in well-established markets such as North American and Europe, as well as emerging markets where consumers are buying their first phones.
Nokia continues to be the market leader with 33 per cent market share, while Motorola captures about 19 per cent with the help of new models such as the Razr.
Bill Keithler, a fund manager with AIM Capital Management, said Nokia has done particularly well in the low-end and emerging markets, and its stock is “relatively inexpensive.”
As far as network equipment makers, he likes Ericcson Telephone.
Semi Conductors
Traditionally, the semiconductor market is not the sexiest place in high-tech because its products tend to be the “guts” of other devices. These days, however, the sector actually has some glamour thanks to interest in iPods, flat-screen televisions, personal computers and cellphones. In particular, there is strong demand for flash memory used in iPods and cellphones. This is good news for companies such as Texas Instruments, Marvell Technology Group, Intel and Micron.
Storage
As the digital world gains momentum, a huge issue for businesses and consumers is where to store mounds of documents, music, audio and video files. It was not long ago that a 20GB hard drive was seen as enormous. Today, many PCs come with 160GB drives as standard equipment — good news for drive makers such as Seagate Technology. S torage has also become an issue for portable devices such as digital cameras, cellphones and MP3 players.
This has sparked sales of flash memory, which have no moving parts and deliver longer battery life than disk drives.
For corporate customers, storage has become a critical issue, fueled by the growing use of digital content and regulatory issues such as the Sarbannes-Oxley Act.
One company expected to reap the benefits of the need for storage is EMC. The company enjoyed a solid 2005 and it is expected to see a strong 2006 with a product refresh cycle hitting the market.
Typically, product cycles are good things for technology companies as people upgrade,” Keithler said. “Given storage is a spending priority for most enterprises, we think EMC will do pretty well.”
Hardware: Apple
In no uncertain terms, the hardware place to be is the iPod. Driven by the power of cool, Apple is expected to sell more than 37 million iPods in 2005 — including an astounding 19 million in the fourth-quarter when the iPod, including the new video iPod , once again was a must-give gift during the holiday season.
Keithler said even though Apple shares have had an impressive run over the past two years, there’s a “reasonable” chance it will continue to perform well in 2006. His optimism is based on the iPod’s momentum and a deal Apple struck in June 2005 with Intel to use its microprocessors in the new PowerPCs, which are expected to hit the market in early 2006.
Keithler, who manages the AIM Technology Fund and the AIM V.I. Technology Fund, is also keen on Apple’s potential to become a key player in the digital home over the next few years, a belief driven by the recent introduction of the Apple Remote.
“We think Apple is probably positioned better than many companies because one of the areas they have historically excelled in is making a very complex process very simple to the end user,” he said. “They didn’t invent the MP3 player by any means, and they still have one of the most expensive devices on
the market, but they have 80-plus per cent market share. It is a very simple device to use; iTunes is very simple and intuitive, and Apple is very good at that stuff.”
Online Ads: Google
When it comes to online advertising, the numbers tell the story. According to the Internet Advertising Bureau, the U.S. online market soared by more than 30 per cent in 2005, to more than US $12 billion. The growth was fueled by the pay-per-click model in which companies only pay when a Web site visitor clicks on an advertisement. This has been a huge boom for Google, Yahoo!, AOL and Microsoft, which have also benefited from the resurgence of banner ads.
Keithler said the online advertising market will continue to gain momentum in 2006.
A big driver, he said, will be younger consumers who are getting much, if not most, of their information from the Web rather than traditional media outlets such as newspapers.
“The percentage of online advertising is still in the single-digits and it will go nowhere but up over the new few years,” he said.
The big question for investors is whether Google and, for that matter, Yahoo! are still attractive investments. Google shares cracked US $400 and it now sports a market capitalization of more than US $125 billion.
“Could [Google] go higher? Sure,” Keithler said. “There are a lot of things to worry about with Google but I think their business opportunities are enormous.
Yahoo! is taking a somewhat different approach and there are more opportunities for it to gain share in the online advertising market. Maybe they don’t take share from Google but there is still share to be taken there. Of the two, Google has more upside in that space.”
So what’s the bottom line for investors looking at the high-tech sector? Simply put, it’s pick your spots, do your homework and take a cautiously optimistic approach. The best advice likely comes from Noor Lalani, a manager with Highstreet Asset Management in London, Ont., who said: “You can’t throw a dart at the technology sector and hope to win, because it’s not going to work that way.”
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