Technology stocks have shown tremendous returns. In this interview Robert Carey comments on specific companies and sectors.
Anytime there is a market pullback or sell-off, many investors try to time the bottom of the market. The technology stocks recently corrected, and there are many values in the sector. Terry Zickerman, DC, LLP recently spoke with Robert CareySenior Vice President, Director of Research of Nike Securities, LP, a Unit Investment Trust Company in Lisle, Illinois.
Zickerman: What is your experience/background going back from the beginning of your career to today with First Trust?
CAREY: I’ve been with First Trust since 1991, joining the firm as a Research Analyst just prior to its purchase by Nike Securities LP and I’ve served as Director of Research since 1992. Prior to this, I worked for Robert B. Ausdal and Co., Inc., for five years, an investment firm located in Davenport, Iowa. In all, I’ve been an equity analyst for eleven years.
Zickerman: Technology stocks have seen tremendous returns over the last ten years, and we still see movement on a daily basis. Please comment about some companies or sectors within the technology field.
CAREY: Technology stocks have indeed been strong performers over the last ten years, particularly since 1991. While the technology segment of the market is very broad with many sectors offering investors the opportunity for long-term growth prospects, our favorite areas include semiconductors, networking equipment and personal computers. The rapid rise of the internet as a viable means of communicating is leading to strong demand for companies that make routers and switching equipment, personal computers, network servers and communications software. Com-munications equipment manufacturers such as Lucent Technologies and PairGain Technologies are benefiting as internet service providers are upgrading their communications systems to reduce bottlenecks and better handle the increased load of internet traffic. Ascend Communications, 3Com, Cisco Systems and other computer networking companies are experiencing incredible sales and earnings growth as internet service providers expand their computer networks. Computer workstation manufacturer Sun Microsystems is generating new revenue and profit growth by selling internet servers while personal computer manufacturers such as Compaq Computer and Dell Computer are enjoying record profits by providing PCs to access the internet.
Even further upstream, semiconductor manufacturers such as Intel and Smart Modular Technologies are participating since their products are contained within the internet hardware. Software vendors such as BMC Software, McAfee Associates, Microsoft, Oracle and PeopleSoft are selling more software as corporations increase their competitiveness by expanding their use of databases to store and retrieve information.
Zickerman: Nike deposited two series of Internet Trusts on January 25, 1996. Series I contained all stocks and Series II was a combination of stocks and US Treasuries Strips. Compare and contrast the two portfolios, then comment about the performance of each over the last year and a half.
CAREY: Since its inception in January, 1996, the Internet Growth Trust Series I has been a strong performer, generating a total return of 102.31% through October 28, 1997 compared to 52.5% for the S&P 500 over the same period. The Internet Growth and Treasury Fund Series II deposited on the same day you referred to and has returned 51.37%. The difference in return can be attributed to the fact that the Growth and Treasury Trust was approximately one-half US Treasury Zero Coupon Strips on date of deposit, a portfolio structure designed for more conservative investors.
Zickerman: Internet Growth Trust, Series III deposited on October 15, 1997; please comment about this new portfolio.
CAREY: The portfolio of the recently deposited Internet Growth Series III overlaps considerably with that of Series I. We kept 15 out of the 24 stocks from Series I and added ten new stocks resulting in an equally weighted 25 stock portfolio. What’s important is that the investment objective remains to find the best values among companies that are presently benefitting from the expansion of the internet. In our opinion, the most attractive values continue to be found primarily in companies which provide the internet’s infrastructure. We have avoided the “pure play” internet stocks such as Amazon.com, At Home, Lycos, Yahoo! and other recent internet-related IPO’s in our belief that the investment “hype” has resulted in valuations which likely exceeded their future prospects. Why take on the extra risk associated with these types of stocks which have yet to generate much in the way of profits when you can invest instead in leading technology companies such as Cisco Systems, Dell Computer, Intel, Microsoft, Oracle and Sun Microsystems, which are deriving substantial revenue and profits from the internet now.
Zickerman: Many investors feel technology stocks are at an all-time high. Why invest in Internet III now?
CAREY: Technology stocks in general have been very strong performers in recent years, in large part due to solid earnings growth and the expectations that business conditions will continue to be strong for the foreseeable future. What’s comforting is that the market has been reacting to these improving fundamentals. Based upon our analysis, we continue to feel that valuations in the technology group overall are in line with long-term earnings growth estimates. As part of our stock selection process, we employ a forward-looking discounted cash flow model that allows us to discern whether or not valuations are too high and whether or not values for the companies themselves can trend higher. Based upon this work, we continue to find many stocks in the technology group that are reasonably priced. As always, of course, stocks in this group are more sensitive to general market movements and subject to short-term declines, much as we’ve experienced in recent days. However, for investors who can tolerate such near-term declines, the long-term rewards can outweigh the risks in our opinion.
Look back ten years ago and count the technological innovations that have impacted your business and personal life. If you see the exponential growth, as I do, you should have a portion of your portfolio invested in technology stocks. s
Robert F. Carey, CFA is currently the Senior Vice President, Director of Research for First Trust Advisors, LP, and as such, responsible for the overall management of research and analysis of the First Trust product line. Mr. Carey joined First Trust under the previous management of Clayton, Brown and Associates, prior to Nike Securities LP purchase of the First Trust product line. He began his career with Robert B. Ausdal & Company, a NASD Broker/Dealer in Davenport, Iowa. Mr. Carey has over eleven years’ experience as an Equity and Fixed-Income Analyst. Mr. Carey is a recipient of the Chartered Financial Analyst (CFA) designation and graduated from the University of Illinois with a BS in Physics.
Terry I. Zickerman, DC, LLC, is a vice president for Gruntal & Co., Inc., in New York City. Prior to joining Gruntal in 1995, Dr. Zickerman worked as a financial advisor at Prudential Securities. He is also a graduate of the National College of Chiropractic. Dr. Zickerman lectures across the country and abroad on asset allocation and retirement planning. His business focus is on the 401(k), SEP, money purchases, profit sharing, defined benefit, personal, joint, uniform gifts to minors and trust accounts. He handles transactions in bonds, stocks, mutual funds and unit investment trusts. Please contact Dr. Zickerman at 800-223-8114 ext. 308 or 212-351-4308 and by fax at 212-370-3426.
The information provided is not to be construed as an offer or the solicitation of an offer to buy or sell the securities displayed. Gruntal & Co., L.L.C., its affiliated companies and/or employees may at times take a position or engage in transactions with respect to the securities described. The information provided has been obtained from sources believed to be reliable, but no independent verification has been made and its accuracy or completeness is not guaranteed. Any prices indicated are subject to change and are indications only. Securities displayed are subject to prior sale.
