April 2, 2001
Searching for Bargains in the
By Mark Veverka
I t was another
unsightly week in Techland, as the carnage continued to spread into the
once-hallowed grounds of fiberoptics and storage. The Nasdaq nose-dived 6%
on Wednesday after Nortel
Networks not only lowered its guidance for the first quarter but
basically bailed on its outlook for the year, saying the global economy is
looking worse by the day. After trading as high as 89 last summer, Nortel
closed Friday at 14.05.
With so little
visibility on the horizon, we decided to ring up one of our technology forum
panelists from last September, the always-eloquent Roger McNamee, to see how
he was handling the maelstrom.
a piece of cake compared to this, but I'm not doing as badly as some people
I know," says McNamee, a partner of Integral Capital Partners, a Menlo Park,
California, hedge fund.
McNamee, who keeps
his mind off of the dour market by fronting for a Grateful Dead-inspired
rock band, the Flying Other Brothers, says he's starting to see some good
values rolling along the perpetual bottom of the tech market. "We are
undergoing a valuation compression, and the "e" (as in P/E) is on a very
steep slope downward," says McNamee.
earnings are taking a beating with no end in sight. So what is our
rock-and-roll stockpicker picking these days? McNamee says he continues to
concentrate on data communications companies, such as Juniper
Networks , Extreme
Networks and Riverstone Systems, which was recently spun-off by
Rochester, New Hampshire-based Cabletron
prevailing, McNamee is careful to say that anything worth investing in is
likely to have some baggage. For example, the demand for personal computers
stinks (which wasn't his precise word choice), but the bright side is that
there is no inventory surplus, implying that PC makers and semiconductors
are getting a lot of love from the value pickers.
An extension of
that kind of thinking is his enthusiasm for certain names in contract
manufacturing, which make computer components, mobile phones and other
devices. While it might seem obvious, not all contract manufacturers are
alike. Indeed, McNamee is fondest of Flextronics which
trades at 15, with a forward P/E of 16.
One of the key
reasons is that, after growing though acquisition, Flextronics has invested
in information technology, making sure all of its manufacturing and
warehouse facilities run on the same enterprise software. The benefit:
greater efficiency and better inventory management.
McNamee says competitor Celestica has
more than two dozen facilities that run on two dozen or so different
enterprise resource planning systems that the company inherited along the
way. As a result, he doubts that Celestica will have a clear idea of its own
inventory from one plant to the next. And having a handle on inventory will
be critical as manufacturers try to navigate their way out of a recession or
economic downturn, giving the edge to Flextronics.
comeback wildly," McNamee predicts.
Because we had
Roger-dodger on the line, we wanted to revisit one of his favorite picks
from last year's tech roundtable: Amazon.com .
At the time, Amazon was selling at above 40, and McNamee was pounding the
table on its behalf. He now admits that he took a hit, saying Integral
unloaded its shares at a loss "after Christmas." Amazon traded at 13.88 on
January 2 and closed Friday at 10.23.
he bought Amazon based on the thinking that the initial report by departing
Lehman Brothers bond analyst Ravi Suria -- Suria announced last week that he
was leaving Lehman to join Stanley Drunkenmiller's Duquesne Capital hedge
fund -- unjustifiably dragged down the shares last summer. His bet: Amazon
would prove its muster with a stellar holiday sales season.
"Our belief was,
not only were they financially viable, we thought they would have a good
Christmas, which I think they did," McNamee says.
Not so fast, we
replied, noting that the e-tailes annual revenues fell short of an already
reduced $1 billion target, and revenue per customer plunged from $40 a year
earlier to $33 against a backdrop of soaring customer attrition.
But McNamee held
his ground: "I was wrong about the threshold of what the Street would give
them credit for. So we just licked our wounds and moved on."
Still, we wondered
whether the fact that Kleiner Perkins partner John Doerr, who is also an
Integral investor, is an Amazon shareholder and director carried any sway
with his stockpicking? "The fact that Kleiner is a business partner affects
my market thinking none whatsoever," McNamee says. "In fact, I couldn't get
Amazon to return my phone calls within a month for the past three years."
Speaking of Doerr,
the high-profile venture capitalist was faxed a letter last week by the New
York Society of Security Analysts Committee for Corporate Governance,
personally inviting the Amazon board member to participate in the group's
upcoming forum meetings. The NYSSA has been trying to get a clearer grasp of
the company's financial reporting.
"Since you have
reportedly stepped forward to act as Amazon's board liaison with the
investment community, and also since you are professionally familiar with
investor information requirements, I ask you to make use of your unique
position to establish effective communications between members of
Amazon.com's board of directors and the Forum," the letter states.
(According to a recent New York Observer article, Doerr tried to quash a
critical research report by Lehman's Suria asking Lehman brass to prevent it
from being published.)
"You should know,"
the letter, penned by forum co-sponsor Gary Lutin, a New York investment
banker, continues, "that there has been no response to my [earlier
invitations]. Amazon's failure to provide requested supporting information
naturally raises many concerns, especially in the context of management's
continuing public promotion of the kind of representations which are being
challenged by investment professionals, the SEC and shareholder lawsuits."
have repeatedly maintained that they have been clear and forthcoming on all
financial reporting issues, despite several reported examples suggesting
just the opposite. In fact, chief executive Jeff Bezos emphatically extolled
his company's supposed openness during his three-hour appearance on CNBC's
Squawk Box last week. In an interview, Lutin says he wants to give Doerr an
opportunity to practice Bezos' oft-stated, open investor relations policy.
"I'm asking Mr.
Doerr to show investors that they can rely on him and the other directors
for effective parental control," Lutin says. Doerr did not return telephone
calls by Barrons.
Internet gabfest gravy train is starting to run its course. Late last week,
the publishers of Internet World magazine, Penton Media, decided to cancel
its "Internet Everywhere CEO Summit II," which was to be held in San
Francisco, April 23-25.
A spokesman for
the company acknowledged that a lack of interest no doubt exacerbated by
deteriorating economic conditions here in Bubbletown was at fault. The
company plans to fold its CEO-centric program into two of its other shows
planned for New York and San Jose later this year.
Good luck. In a
study first reported by The Wall Street Journal last week, it was predicted
that about 80% of Bay Area dot.com companies still showing a pulse will fold
over the next year, wiping out about 30,000 more jobs. Maybe Penton should
develop a new conference. Might we suggest the "Out of Work Everywhere
Internet Casualty Summit."
Copyright © 2001 Dow Jones & Company, Inc. All Rights