Greencore (GNCGY), a sandwich and convenience foods manufacturer operating in Ireland and the United...
Technology Marches On Around the World
12/03/2009 12:01 am EST
David Eiswert, manager of the T. Rowe Price Global Technology Fund, is bullish on tech earnings and undervalued Asian champions.
Q. What's your broad outlook for technology shares?
A. In general, the economy is stabilizing; the probability that someone is going to get fired this holiday season is a lot lower than last holiday season. Inventories are low; in the tech economy, there are no excesses. When we talk to chief information officers about tech budgets for next year, they all sound very solid, they all sound like they're going to be up.
Q. Is it possible that valuations have gotten too high?
A. Relative to history, relative to the market in technology, they are not overdone. I lived through the bubble in 2000 and through 2007-2008, and there were tech stocks trading at ten times sales or 40 times earnings. You don't see that now.
This looks like a very natural recovery, where business stops getting worse, the stock market rebounds, high-income consumers come back to the market and then the supply chain demand tightens, hiring increases, the lower-income [workers] get new jobs and then follow on later in the cycle to drive it higher.
Q. You obviously have done well this year. Where are you finding the outperformance over other tech funds?
A. In the beginning of the year, we were massively overweight components and semiconductors. We decided that the way the supply chain looks based on how these companies are reporting earnings is not real—it can't be this bad. Therefore, inventories are being run down and [demand] will come back. That paid off in spades and we began to take [the trade] off this summer.
The other place is just stock picking. We had significant bets in Apple (Nasdaq: AAPL) and Palm (Nasdaq: PALM), [as well as] Extron and Veeco (Nasdaq: VECO), which are companies that make equipment to make LED lights for the backlighting of TVs and monitors. Extron just did an equity offering, and basically these guys [say], we've got to raise more money to build more factories because we've got to build more machines.
Q. And is that a technology shift or improving demand for the end product, the TV?
A. LCD TVs continue to take share, especially in China and other emerging markets, where sometimes it's the first TV. But it's also a technology change—LED (light-emitting diode—Editor) uses less power, produces a better picture, and allows the panel to be thinner. This shift really just began at the beginning of this year and it's just exploded.
Q. What's your next play?
A. In recent months, I did begin to make the fund a lot more defensive. We took a big position in IBM (NYSE: IBM); Microsoft (Nasdaq: MSFT) is a big position, as is Google (Nasdaq: GOOG). We really tried to shift the portfolio toward larger caps and less-volatile earnings.
Q. Are there some overseas tech suppliers, perhaps less familiar ones, that have drawn your interest?
A. Shin-Etsu Chemical (Tokyo: 4063) [makes] silicon wafers for semiconductors, and they're probably the leading global supplier. The stock's been punished because people haven't seen the earnings recovery that they've hoped for.
But when we look into early next year, we're very optimistic about a steady upturn in demand for foundry wafers and memory wafers and a shift toward 300mm or bigger wafers. So, Shin-Etsu Chemical is sitting in this sweet spot where as volume returns, there's a tremendous amount of operating leverage in the model. It's trading a little over 1.4x book [value], and it's only been lower than that in the fall of 2008, when the world was coming apart.
Hon-Hai Precision (Taipei: 2317) is a Taiwanese contract manufacturer—they manufacture most of Apple's products. They moved a lot of their production west into China during the downturn, so they have a tremendously advantaged cost structure, even more than most Chinese competitors. It's trading at a very reasonable 12x earnings.
I'll also give you Canon (NYSE: CAJ). No one's bought a photocopier or a printer for two years—it's been a terrible market, and we think that by the second half of 2010, that market's recovering and Canon has fantastic exposure.
GameLoft (Paris: GFT) is a French gaming company—about a $200-million market cap. They've made a tremendous push toward making games for the iPhone. We have 30% of the fund invested outside the US, and we really look for names that we think other people aren't aware of.
Q. Is overseas the more promising hunting ground for you now?
A. Definitely in the small and mid-cap space around components. We look for a cheaper, lower-cost model that is going to take share. The other thing we look for is brands, especially in Asia, that have the potential to take share over time. So, Acer (Taipei: 2353) is a stock we own.
The other place we see tremendous growth is Chinese Internet. Hence, we own Tencent Holdings (OTC: TCTZF) and Baidu (Nasdaq: BIDU), and we've been adding to those names in the past few months. The Chinese Internet market is just in the second or third inning, and it's really hard to value these companies, so what we focus on is just those we think can have the most impact—as in, who can be Facebook in China? Because the growth is going to be tremendous, and it's a market where international players like Google have a much harder time dominating.
Q. Thank you.
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