Report on E-business
E-biz fund managers pick comeback kids
In wake of dot-com fall, here are
Friday, May 25, 2001
top turnaround choices from four pros
GAIL EL BAROUDI
Special to The Globe and Mail
If you believe the venerable market wizards who argue that the optimal time to buy is "at the maximum point of pessimism" or "when the blood is in the streets," then you may want to take a good look at mutual funds that target e-commerce, and the companies they hold, right about now.
Granted, the timing hasn't been great for the firms that launched a handful of e-commerce funds in the past year or so. Many have lost more than half of their value, mirroring the 55-per-cent fall in the Nasdaq Stock Market composite index since March, 2000.
Though the index has since snapped back, the short-term outlook for the sector remains cloudy.
But managers of these funds are looking across the valley and stocking up on companies they believe will stage impressive comebacks.
John Sinkins, a portfolio manager with Sentry Select Capital Corp. in Toronto, doesn't mince words about his outlook for 2001. "This year will be a washout in technology. At best we can hope for a recovery in the fourth quarter, but I'm confident about the outlook over the next 12 to 24 months."
E-commerce companies -- especially those with business-to-business applications -- will flourish, he maintains. "Over the long term, this will be the fastest-growing sector, so these stocks have to be a part of your portfolio if longer-term growth is what you're after."
Dan McClure, a partner with I.G. Investment Management Ltd. in Toronto, says e-commerce is here to stay. "We've had tremendous euphoria, followed by a crash, but e-commerce is part of people's lives now and consumer behaviour will change even more during the next five years," he predicts.
Given that these fund managers have their eyes firmly trained on e-business, we asked them and two others for their No. 1 picks in the sector -- the company they believe will turn in the most impressive -- and rewarding -- performance over the next couple of years. Here are the e-business fund managers and their choices:
Sentry Select E.Commerce and
Internet Technology Fund, 1999
Pick: Broadcom Corp.
Mr. Sinkin's top choice is Broadcom Corp., a Nasdaq-listed company based in Irvine, Calif., that makes computer chips for cable-modem and digital-subscriber lines used for home Internet access, as well as chips for computer-networking systems.
"This is a buy-low story, a company that is more than 80 per cent off its high, but has real earnings and is focused, aggressive and has shown rapid growth in the past," Mr. Sinkins says.
It reached a high of $275 (U.S.) in August, 2000, and now trades at around $45 -- having dropped as low as $21 early last month, he adds.
Broadcom's major customers are California-based companies Cisco Systems Inc., a networking-router manufacturer that provides the "highway" to the Internet, and 3Com Corp., which produces modems. As these companies recover within the next year or two, Broadcom should also rebound strongly, Mr. Sinkins predicts.
For 2001, he looks for marginal earnings of just 15 cents a share but estimates 60 to 80 cents in 2002. In a normally growing market -- rather than a raging bull one -- this stock can trade at 80 to 100 times its trailing earnings because of its impressive growth rate, he says. "So at a conservative estimate of 70 cents for 2002, it could go to $70 to $75 in a normal recovery market."
He likes the company because it operates in high-growth markets and because it is relatively small. "Its revenue is about one-thirtieth the size of Nortel's; these small, rapidly growing companies capture the attention of investors because they are easier to grow internally and should outperform as we move into a more positive market."
Investors Global e.Commerce Fund
Pick: eBay Inc.
Mr. McClure's first choice is the well-known on-line auctioneer based in San Jose, Calif.
It has 30 million registered users around the world. Revenue grew to $431-million last year from $33-million in 1997 and he estimates it will hit $650-million this year. But earnings remain slim, at 17 cents a share in 2000 and estimated at 40 cents for 2001.
The stock's price hit a high of $121 in March, 2000, and a subsequent low of $30 in January, but at a current $58, it still trades at about 140 times this year's estimated earnings.
Why pay such a high multiple for a stock? This company is at the "infant stage of a buildout," Mr. McClure says. About 18 per cent of Americans have tried on-line shopping and he expects that figure to reach 25 per cent within the next couple of years. Once that threshold is reached, he expects a faster acceleration of market penetration. "We've seen it with colour television, with cellular and we can expect the same with on-line retail sales," Mr. McClure says.
On-line purchases currently make up only 1 per cent of all U.S. retail sales, but he expects them to rise to 5 per cent -- the historical level of catalogue sales -- which would be an increase to $135-billion a year from the current $25-billion, he adds.
"If we get there by 2005, that will mean a 40-per-cent annual growth rate, or, if it takes until 2010, 25 per cent in annual growth. Investors in eBay should have a two-to five-year horizon and, at current levels, they might want to start nibbling and be ready to pounce on any short-term pullback," Mr. McClure adds.
Royal E-Commerce Fund
Pick: Interwoven Inc.
Mr. Cooke's top choice is Sunnyvale, Calif.-based Interwoven, which produces software for Web-content management.
Interwoven's product helps in the setting up of corporate Web sites and then tracks and manages the information on the site thereafter.
It automatically updates the information, including details such as product improvements, new products and price changes.
Mr. Cooke says Interwoven is a leading company in its field, an area that he believes offers huge potential and is one of the hottest in the e-business sector.
It generated less than $1-billion in revenue last year, but that will grow to more than $6-billion in 2003, he predicts. He adds that the company has better distribution networks that any of its competitors.
The stock hit a high of $68.50 in September, 2000, plunged to a low of $5.84 early last month and now trades at about $15. At that level, it is priced at about 150 times this year's projected earnings of 10 cents a share and 60 times estimated earnings of 25 cents in 2002, Mr. Cooke says.
That earnings multiple is not excessive, in his view, because of the company's extraordinary growth rate. He expects last year's revenue of $132-million to jump by nearly 90 per cent this year to $250-million and another 45 per cent to $360-million in 2002.
TD Global E-Business Fund
Pick: i2 Technologies Inc.
The top choice of Mr. Hilfing is Irving, Tex.-based i2 Technologies Inc., a Nasdaq-traded manufacturer of business-to-business software that tackles supply-chain management problems such as order management and fulfilment. "Basically, it answers the questions -- who will supply this component at the best price and provide the best delivery?" says Mr. Hilfing.
This is one of the fastest-growing areas of the software market because it gives companies a huge competitive boost by helping them find the optimal purchase and delivery of the components they need, he explains.
"Companies are less likely to delay investing in this software in a downturn because it improves the bottom line -- you start saving as soon as you set up."
And the company dominates this fast-growing sector, accounting for more than 70 per cent of sales, he adds.
In 1999, the stock soared to $110, fell to a low of $12.50 in last month's tech selloff and currently trades around $28.
Explosive revenue growth -- $1.1-billion in 2000 was almost double that of 1999 -- will slow this year, although he still expects it to hit about $1.3-billion.
In spite of healthy revenue, Mr. Hilfing forecasts a loss of four cents a share this year because of high operating costs.
The company has a plan in place to cut costs over the next three quarters; in 2002, he looks for revenue to jump to $1.6-billion and earnings of 23 cents a share.
"The stock has suffered because of the recent slowdown, but the need for this product is definitely there and the orders that are waiting on the sidelines could pleasantly surprise us all."