The best corporate managers are always one step ahead. Salesforce is the second coming of Amazon.com...
Michael Murphy: Tomorrow's Technology
10/31/2003 12:00 am EST
"We think it's clear that technology is now past the bottom and things are improving," says Michael Murphy, money manager, author, and newsletter advisor. In San Francisco, the tech expert discussed his top five stocks to benefit from the next wave of technology and increased capital spending.
"The PC sector has been doing well for several quarters. Enterprise software is picking up. Wireless is getting better. Optic is probably next. The broad question is whether or not companies are going to start spending money on technology products. We think the purse strings are going to loosen and that money is going to be spent. We look at a measure called price to growth flow; growth flow is a combination of earnings plus the money spent on research and development. We try to find price to growth flow that is less than the growth rate.
"It does look like there is some speculative froth out there and that does worry us. If you look at sentiment measures, people seem pretty complacent. Nevertheless, we are coming into the time of the year where you want to own these stocks. November, December, and January is often a good time to book a lot of the gains made in these stocks. We want to be cautious on valuation, but we are looking to put some money to work here. Here are some of our current favorites:
"BMC Software (BMC NYSE) is an enterprise software company–a sector where people are beginning to seriously spend some money. We have a $15 buy limit on this stock. The neat thing about BMC is that the company reports about $0.70 to $0.80 a share in earnings, but spends about $3 a share in research and development. If they wanted to pump this stock up to $30, they could by cutting their R&D spending in half. But what they are trying to do is build a great, long-term company. We like that they are spending their money on research. This is a company that is growing at 15%+. And we don’t think there is much downside risk.
"JDSU Uniphase (JDSU NASDAQ) is our second recommendation. We’ve been waiting all year for the optical business to improve, and it finally looks like it is turning. We have the Department of Defense’s bandwidth expansion project, where contracts are about to be awarded. A lot of progress is being made on Internet2, currently a project of universities. This is a higher speed Internet and fiber will eventually be extended to homes. Under $4 a share is a good price. Just buy some and put it away. We think you can make five times on your money in JDSU over the next three to four years.
"Oracle (ORCL NASDAQ) is a buy under $12. We think the PeopleSoft situation will be resolved soon. Our guess is that Oracle will walk away from the situation. Meanwhile, we like companies that are dominant, and when it comes to getting an old economy company (like Caterpillar) on the Internet so that they can cut their expenses, Oracle has the proven numbers. We worry about the number of people that have left there, we worry about Larry Ellison. But they still have the products and the market share. And the stock is relatively cheap.
"Taiwan Semiconductor (TSM NYSE) is also a buy under $12. During the industry downturn, they did something we really like–they spent a lot of money upgrading their factories with the latest manufacturing equipment. I think most people would now agree that their manufacturing capabilities are equal in quality to Intel and IBM, which is the top tier. They are doing extremely well. They are building factories in China, with (at least informally) the blessing of the Taiwanese government. We think in the new era very few companies are going to be able to build their own semiconductor manufacturing factories, so they will increasingly go to companies such as Taiwan Semiconductor.
"Pegasus Solutions (PEGS NASDAQ), which is somewhat controversial. It’s a hotel reservations company which was set up by the big hotel chains. We have it as a buy under $14. Parts of their revenues are leveraged to increasing room rates. We are just finally starting to see some firmness in room rates–for the first time since 9/11. Part of it is using the Internet to make travel reservations, where the company gets some fees. We think this stock looks mighty cheap. We think there is not a lot of risk here. The company is not well known, but it has an awful lot of technology in place. We think it’s a good buy right now."
Now about new highs being celebrated, amidst deterioration of a slew of internals: This suggests nei...
In part 1 of our commentary, we discussed the current Fundamental Gravity of our “Slowing Drag...
Some analysts are making the case that it’s time to look outside the U.S. at stocks in non-U.S...