By Amey Stone The once fertile ground of wireless has become a minefield for investors. Palm (PALM) was the latest to drop a bombshell when it warned on Mar. 27 that revenues for its May quarter would be almost half of what investors were expecting - only $300 to $315 million instead of $575 million. The stock fell almost 50% on Mar. 28.
Concerns about the huge amount of capital required to upgrade wireless networks and fallout from the economic slowdown have hammered all the leading wireless names. Nokia (NOK), the bellwether of the group, is now at $25 a share, vs. $63 last June.
Yet the wireless sector is still growing, albeit not as fast as once thought. Nokia, for example, forecasts at least 20% year-over-year growth. "Right now it is hard to stomach," says Jeff Provence, portfolio manager of the Wireless Fund (WIREX), "but the fundamentals have not changed nearly as much as the stock prices have."
REBOUND OPPORTUNITIES? Investors who hope to participate in an eventual rebound may want to consider the crop of new wireless-sector funds, which invest in service providers, handheld makers, component producers, and software and infrastructure makers. The funds offer instant diversification and a professional at the helm to keep track of earnings forecasts, contract awards, and technology shifts.
"You have to be pretty prepared to trade," in the current environment, says Seth Kirkham, portfolio manager of Investec Wireless World (IWWDX). "Volatility can be an opportunity." He recently bought Nuance Communications (NUAN) when the stock halved following its earnings warning. But he sold Motorola (MOT) after its first warning last year. "It seemed quite clear to us that the downgrades we saw from [Wall] Street did not match the degree of negativity we heard from management on the conference call," he says.
Still, Morningstar fund analyst Bradley Sweeney warns that there's little evidence a fund can do much to protect investors from the slide. All four available wireless-sector funds launched last year just as stocks in this group were peaking, and all have had negative returns since inception. Year-to-date they are down anywhere from around 20% to more than 40%. The Philadelphia Stock Exchange Wireless Telecom index is down 29% this year. "Even though valuations have come down, there is still a tremendous amount of risk in opting for a wireless fund," says Sweeney.
ALL FALL DOWN. Fidelity Select Wireless (FWRLX) has sustained by far the least damage of these young funds -- down only 19% so far this year. Manager Shep Perkins was unavailable for comment, and Fidelity hasn't released a full portfolio, so it's tough to tell how he has outperformed the rest by such a wide margin. Top holdings as of the end of last year include Alltel (AT), Nokia, VoiceStream Wireless (VSTR), Vodafone Group (VOD), and AT&T Wireless Group (AWE). It also had a 13% cash stake, which may have helped minimize the pain. Morningstar's Sweeney says he is confident the fund will be a standout among its peers, in large part because it is backed by Fidelity's huge research staff.
Probably the broadest fund, and with the next best performance, is Investec Wireless World, down 29% this year. Along with its wireless plays, the fund includes companies outside the technology sector that are using wireless technology to change their business models. For example, one of the fund's top holdings is Nordea, a Scandinavian financial-services firm that has 25% of its customers accessing accounts through a wireless browser on cell phones.
"A lot of people today see wireless technology...as nice to have but not necessary," says Kirkham. "We believe the technology will alter business models to such a degree that it will actually improve the return on capital employed and, consequently, will create shareholder value."
GREAT AND SMALL. Among its tech holdings, Investec Wireless seems to have a more eclectic mix of foreign (50% of assets are outside the U.S.) and small-cap companies than the other wireless funds. Kirkham's favorites include Israeli companies Comverse Technology (CMVT), Amdocs (DOX), and tiny TTI Team Telecom (TTIL), all of which build advanced software and systems for wireless operators. Some operators may benefit from reduced customer-acquisition costs, and Orange, Vodafone, and NTT Docomo are holdings.
The Wireless Fund seems to gravitate more to the major wireless names, which hasn't provided much protection. It's down 42% so far this year. Portfolio manager Provence says he has his favorites in each of the wireless subsectors: Nokia among handhelds, Qualcomm (QCOM) in the chipmakers, Sprint PCS (PCS), and ATT Wireless among service providers, and Openwave (OPWV)among software makers. The fund also ventures outside of wireless and has owned tech names like Cisco and EMC, which haven't helped returns lately, either. While Sweeney says he likes the approach of the Investec Fund, he adds, "Wireless is not a fund I feel comfortable with."
The Turner Wireless & Communication Fund (TIWCX) is down 41% so far this year. Nonetheless, Sweeney says he is impressed with the Turner fund family and wouldn't write off this offering. Portfolio managers weren't available for comment by deadline, but at the end of February, top holdings included Comverse, ONI Systems (ONIS), Verisign (VRSN), Metromedia Fiber Network (MFNX), and Openwave.
UNEXPLODED BOMBS. Despite the negative returns, for investors who want to participate in an expected rebound in wireless stocks once the economy improves, a good case can be made for letting a pro pick your stocks. "It really is difficult to assess how much value the managers are adding when the industry is getting killed," says Sweeney.
Fund managers expect a rebound in 2002, depending on the severity of the global economic slowdown. "I do believe when [the rebound] comes, it will be fast and furious," says Provence, who recommends investors start putting money into the sector now. But given that the bombs are still going off in the wireless minefield, it's still probably a little early. Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column.
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