Five Stocks for the Next Cycle

05/28/2004 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

As always, technology expert Michael Murphy was one of The Money Show's most popular speakers, with standing-room only crowds. While he cautions investors to look for a summer slump, he still finds some potential winners that he suggests buying now.

"For perspective, when we met at The Las Vegas Money Show back in 2000, that was an incredible year for capital spending. Business and government spent $468 billion on information technology, putting in the information superhighway. Most people would assume that this figure has fallen sharply since then. But it will be $542 billion this year. Semiconductor sales were $202 billion in 2000, which was an all-time record, and this year we will exceed that level. Cell phone sales were $400 million in 2000, and this year we will do $580 million. So the stocks are down, but business is up very strongly across the board.The upgrade cycle is well underway.

"It might make sense to sell tech stocks if we were within a year of the top. But we are not. This cycle has at least two or three more years to play out. Investors should keep a modest amount in cash for further opportunities later in the summer, possibly after the typical summer slump. However, the markets have dropped sharply recently and taken many of the big winners of the next technology expansion down to real bargain levels. If you have cash to put to work, you should take advantage of these prices.

"Taiwan Semiconductor (TSM NYSE) is trading under $10 because the Taiwan government has been selling its shares, and everyone is worried about political concerns in that country. I bet that by this time next year, nobody will even remember these concerns.

"Lexar Media (LEXR NASDAQ) makes the chips used in digital camera. The company just reduced their estimate for the year from 64 cents to 60 cents and raised their revenue estimates- and the stock got cut in half. I recently had lunch with the CEO and he feels the second half of the year will be gangbusters for them.

"Packeteer (PKTR NASDAQ) is a crucial part of one of the hottest areas in tech right now- Voice-over-Internet Protocol. VoIP is the substitution of the Internet for dedicated telephone lines, at tremendously reduced cost to the user. The March first quarter was their tenth straight quarter of sequential revenue growth (which means they grew right through the tech downturn), their seventh straight quarter of record revenue and their eighth straight profitable quarter. In addition, this company looks inside the packets of data traffic, which could prove to be the first line of defense against a lot of computer viruses and worms.

"In addition, here are two stocks that are real swing-for-the-fences picks. Zhone (ZHNE NASDAQ) is run by a guy named Morey Ejabat, who came into Ascend Communications as a tiny company. He took it public and sold it to Lucent for $24 billion. He then left to start Zhone, and he has been acquiring assets during the tech collapse at ten cents on the dollar. Zhone sells Internet access products which are sold through the telephone companies. And he just made an acquisition that will let him sell through cable companies as well. He is determined to have the broadest line of Interest access products.

"Corvis (CORV NASDAQ) has the best all-optical switch for optical networks. They saw their business collapse in the telecom depression. But this is a smart management team. One of their biggest customers was the Broadwing subsidiary of Cincinnati Bell, and when that company got in trouble, Corvis bought the operation for pennies on the dollar. It was a great move. They are now acquiring Focal Communications, a competitive local exchange carrier. The merger should close in August after the companies work their way through the various state public utility commissions. When you put the two acquisitions together, you basically get a local and long distance company with the lowest cost and highest quality network, assembled for pennies on the dollar."

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