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Back to Bucks in Technology


The last eight years have changed Technology for the better...


"Get the pancakes," he mumbled without looking up at me after meeting for the first time just minutes before. I nodded in agreement for the waitress who knew this regular and she smiled knowingly. His beard hung above a worn-out denim shirt over a pair of old jeans. If you had to guess what he did, you'd rank truck driver well before the correct answer. If you had to guess where this flapjack house was located by looking at the eclectic decorations inside, you would have even more trouble.

That was eight years ago. I sat in New York City two weeks ago at a Technology conference and thought about that strange breakfast meeting. Much of what he had dreamed up and shared with me that day was now being discussed as reality for a standing room only audience. I shook my head while I thought back to that unusual time, not just for me, but for millions of people with billions of dollars invested in Technology stocks on that day in 1999.

The pancakes were fantastic but I still wondered what all the fuss was about for this place called Bucks in Woodside, California. It would be a few years later that I'd learn it was ranked as the #1 power breakfast choice in the country – the nursery for the biggest deals ever born in Silicon Valley. I didn't realize that day what a legend in Technology my pancake tout would become, and I had no idea how brilliant his next call was about to be.

As a matter of fact, I had every reason in the world to doubt him considering he wanted to listen to a 26-year old trader who had a simple idea about an un-crowded trade at the time. I was flown out with only a few years of trading under my belt because I thought I knew what was going to happen in the Energy markets. I was lucky that a friend who was an extremely bright and humble (a rare pair out there at the time) ex-Valley ace wanted me to share what I had been working on for him with some of his friends who had started companies that are now household names. Honored and flattered does not even describe how I felt. Pressured too. I loved every single minute of that trip. We sat, poured syrup, and chewed on the reasons why I didn't think oil would cost $20 or natural gas $2 for too much longer. More unusual than my call was his desire to listen to a crazy idea from this Texan while everybody back home (and everywhere else on the planet) wanted to put every $20 they could find into companies like his. We sold a crowded sector and bought an un-crowded sector. Energy made up about 6% of the S&P 500 at the time, believe it or not. Remember how much Technology made up?

I caught a game at 3Com Park on that trip, sitting along the third baseline right above a lean leftfielder named Bonds. I actually wrote a letter to my clients about how crowded the Technology trade felt all around me on that trip, and pointed out that over 30% of all sports stadiums were named by Technology/Telecomm (T&T) companies.

Much has changed since then. One share of 3COM (COMS) is now worth about the same as a box of those tremendous garlic fries, at about $5, after a buyout was announced just this morning. Bonds played his last game at that park with a new name this week. Not too long ago I pointed out to my partners that the same eerie number had been reached in my stadium naming index that we've kept updated. Now over 30% of names are financed by… gulp… financial companies. It may loom equally as ominous this time around when you consider the startling similarities run parallel inside the Stock Market as well. At the end of the 90's just over 30% of the market capitalization of the S&P 500 mirrored the stadium index stat and was made up of T&T names. Eight years later, if you include financial service arms of constituents in the S&P 500, the Financials have now reached almost the exact same level, just above 30%. Haven't we seen how this movie ends?

What I believed eight years ago is what I believe today – that great companies are not great stocks once their sector becomes over-owned. It would not matter that in the years following my pancake breakfast technology innovations would surpass even aggressive expectations, or that many of the company's balance sheets improved substantially, or that their operations could be run much more efficiently. It mattered that just about every large investor that wanted to own Technology eight years ago already did, and once that boat of tremendous ideas was full, there remained one un-answered question – who was left to push the boat? The shares needed new customers, not the companies.

In this business our destiny often chooses us. And in my case, the formative years were spent managing a stock portfolio during one of the most crowded trades of all-time in Technology, but having the unbelievable fortune of officing next to one of the greatest Energy traders of our time during one of the most un-crowded setups in Energy that we will ever witness. For those wondering why I always reference work on whether a trade is under-owned or over-owned, crowded or not, now you know and I thought it might be helpful to share. I am biased and blessed to have learned from one of the best.

This context is certainly needed if you are wondering about my next crazy idea. As I scribbled notes and observations from the Technology conference earlier this month, something else struck me as more important than tickers which can get trumped with big bucks if they are re-allocating from other sectors. For all the concern I have about Financials - that I've under-weighted or been short of – I've become even more interested this year in where capital re-allocations will land. I believe one of those answers is Technology, and I do not think the shift is over.

Casual investors forget that when the T&T bubble burst it didn't kill the Stock Market, it killed a sector of stocks where supply overwhelmed demand. I wrote to partners in the Spring of 2000. An excerpt from that letter reads:

"The next two months will see 2.4 billion shares of Internet stocks become unlocked and free to be sold all at once. This represents 220% of the existing supply of shares that were available in the stock market."

I remember that time well, I got married in March of 2000 – you wanna see a look of "oh my god I just got top-ticked look of fear"? - the picture of my poor wife when she realized she got signed to a long-term deal with me. I have been under-weight T&T ever since that time, often dramatically so. As the stadiums got re-named so did much of the S&P 500 index as T&T's weighting was more than sliced in half. It was not until earlier this year that my firm raised our weighting in line with the S&P 500. Then, as one of the models we designed finally suggested, we over-weighted the Technology sector for the first time since I have been running money, and remain so today.

I sat in meeting after meeting and talked to plenty of company chiefs and analysts at the Technology Conference this month. I read countless follow-up notes and reviews after it was over. So much has changed in the past eight years. So much went wrong for so many investors while perversely and painfully at the same time so much went right for so many technology companies. So many lawsuits were filed that the reports I was now reading had disclaimers that were actually longer than the analysis. So… what changed my mind?

What changed the most were the guys sitting on the left and right of me, not in front of me. In my opinion, the one data point that offers the most potential for the shares in this sector may be substantially underestimated – the potential for new ownership. We just about lost an entire generation of its original supporters. Many of the analysts are gone, many of the funds closed or blew up, and the new issuance of supply stopped swamping demand.

The most striking comment from the entire conference was a note I almost threw away without reading – the "Feedback" from the conference's guests who are money managers. There was a consistent complaint that speakers didn't give enough basic information about their companies and instead went straight into more advanced Q&A. I wondered what the problem was, as I was used to that format and preferred it as a chance to dig a little deeper. So I did a little more digging myself and ask around and sure enough it finally hit me and was confirmed by my hosts – the guests were new to these names. For the past several years these conferences have played before regular audiences of tech specialists. This year, there were brand new faces who ran non-tech-focused funds. They wanted more basic information because they did not know anything about many of these companies and had never owned their shares.

Then, as luck would have it I ran into the same friend responsible for that pancake breakfast eight years ago. I couldn't believe it. I hadn't seen him in two years. Nobody knew these companies better. But if you think Technology is a crowded trade, you'd be surprised to learn that even he hasn't warmed up to them again yet, and was actually still short certain names. The last eight years have changed Technology for the better, and best of all just might be that an entirely new group of investors is just now looking.

Click to enlarge

After looking back at all my notes there were ten that stood out as names I'll do even more work on and am intrigued by, including two names I already owned and feel a little bit better about.

MEMC (WFR), Nuance (NUAN), Integrated Device (IDTI), Amphenol (APH), McAfee (MFE), ValueClick (VCLK), Audible (ADBL), Nvidia (NVDA), Intersil (ISIL), Avnet (AVT).

I did some math during a rather uninspiring keynote delivered by one of my favorite Longhorns, Michael Dell. There is little doubt in my mind that he is playing from behind and knows it. Yet, he generated the largest crowd. Remarkably, you could buy every single share for the ten companies listed above for about the same as it would cost you to buy Dell in its entirety – around $62 billion. Yet, take a look at the comparison of what you'd get for that price. On the left is the equally weighted average of the group above.

To give you an idea with one of the measurements my firm uses, about how we look at crowded versus un-crowded, we looked at each of those for no particular reason other than having just sat through their presentations to test our hunch about new ownership. As a group, as of the latest quarter's filings there were 2,063 mutual funds which show up as new holders and that is in one quarter alone.

Where could some of this money be coming from? Citifield is set to debut as the new stadium name for the Mets, after Citigroup (C) agreed to pay $400 million. Almost 5,000 mutual funds are long the name and wonder why the stock and sector cannot move higher. We've been on this boat before, no? I think the pancake playbook still works and we will avoid or sell the most over-owned sector in our view, Financials, and look for another barrel or two of $20 oil with my friend, but this time in his backyard not mine – down the road from Bucks and back into Technology.

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Positions in NUAN, WFR
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