Technology is where the growth has been -- and will continue to be, says Erick F. Maronak, managing director, director of research, and portfolio manager for NewBridge Partners. He's buying in that stock sector but "as always, very selectively."
His firm holds only 25 stocks at any one time and focuses on long-term growth. The top holding is AOL Time Warner, Maronak having first added AOL to the portfolio in 1994. Despite some roller-coaster rides, he admires the company's vision and adds that the timing of the merger between AOL and Time Warner "could not have been better." Another sector he emphasizes is health care.
Maronak made these comments in a chat presented June 21 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Amey Stone of BW Online. Edited excerpts from the chat follow. A full transcript is available from BusinessWeek Online AOL at keyword: BW Talk.
Q: What's your macro view of the outlook for stocks?
A: I see an improving environment, after five rate cuts from the Fed, moderating oil prices, and a slowdown in dissemination of bad news, except in some parts of technology.
Q: Your firm has been a big technology investor. Are you buying technology names now?
A: Yes, we've always been big investors in tech, and the amount has generally been in the range of 40% of our overall portfolio for a long time. The reason for big exposure to technology is that's where the growth has been.
Q: What tech names do you see as worth buying now, and which have held up best for you?
A: We're buying tech now, but as always, very selectively. The names that have held up best have been in storage and, until very recently, Nokia (NOK). As far as what stocks are well-positioned and attractive, I would say Veritas Software (VRTS), Nokia, and for those who can stomach volatility, Juniper Networks (JNPR).
Q: Is the semiconductor sector at the bottom?
A: Some would say we're much closer to a bottom than six months ago, but if you look at the semiconductor book-to-bill ratio, it's still declining at most semiconductor companies. However, it's important to differentiate between [chip] companies -- for example, communications semi companies have higher levels of inventories than PC semi companies at the moment. It could take a while to normalize their growth patterns.
Q: Where do you see the health-care industry going in the next 12 months? Any names to recommend there?
A: Health care has always been another major of investment for us. However, we typically limit our investment to pharmaceuticals and medical-device companies. Our favorites are Pfizer (PFE), Forest Labs (FRX), Medtronic (MDT), and Amgen (AMGN).
Q: What's undervalued in tech right now and worth picking up?
A: It's a little dangerous to use the term "undervalued" for tech right now, especially if you're talking about the next two or three quarters. However, if you have a long-term perspective, as we do, and believe the areas of growth will be telecom [wireline and wireless] and storage, then there are several companies with more attractive prospects and prices vs. six months ago. Veritas, Juniper, and also EMC and Cisco (CSCO) are names we like.
Q: Is it a good time to buy techs like Lucent (LU) and Motorola (MOT)? Basically, they seem underpriced.
A: We usually avoid companies that are plagued with as many problems as Lucent and Motorola. You need to distinguish between which companies are not doing well because of cyclical issues, such as a slowing economy, vs. companies suffering from company-specific problems, like Motorola and Lucent are.
Q: Storage king EMC (EMC) has really been pounded lately and is even getting close to its early April low. Why so much bad news now?
A: Here again, the pressure on EMC's stock price may be reflecting the fear that beyond the cyclical slowdown in the storage market, there's further pressure on their pricing structure, which has always been at a premium to its competitors. While few customers would argue their premium was deserved, in a difficult environment that favors the buyer, even the most dominant players can see declining margins.
Q: Let's go for the retail sector -- any recommendations like Home Depot (HD) or American Eagle Outfitters (AEOS)?
A: A major holding for us in retail is Home Depot, but historically we haven't invested in apparel companies. We like to see high barriers to entry in our portfolio, and we believe the barriers to entry in the home-improvement retail area are higher than in the apparel sector.
Q: What are the best stocks to invest in for short-term growth? Is that a realistic goal in this environment?
A: Since we're long-term investors, we don't have any suggestions for short-term opportunities. We think this environment highlights how difficult it is in the short term. Investors are much better served by focusing on where the long-term demand is greatest and trying to pick the leader in those areas. Good management at leading companies will get you through the tough times.
Q: Do you like GE at the current price [around $50]?
A: Regardless of the current price, GE (GE) is an admirable company. It's growing faster today than it did 10 years ago, and while its earnings growth is 15% or so, it has been quite consistent. Finally, management has a stellar track record. So the question to ask is, is this a stock that you want in your portfolio?
Q: Out on the leading edge of health care, any suggestions in biotech?
A: There is more going on in health care than ever, due to the application of computing power to life sciences. Last year's mapping of the human genome is an example of what's to come. Our biotech investments are limited at the moment to Genentech (DNA) and Amgen (AMGN). In the future, the 25-stock portfolio we manage may include a more direct investment in genetics companies such as Human Genome Sciences (HGSI).
Q: What is your top holding -- and why?
A: Our top holding is AOL Time Warner (AOL). It has been in the portfolio since 1994. We've endured a number of roller-coaster rides with the company, but each time there was a significant change in strategy, we've always felt management had the correct vision, and they've proven to have an ability to execute as well. Looking back over the last 12 months, Steve Case's timing on merging with Time Warner couldn't have been better.
Q: Here's a classic question for a money manager: I have $100,000 -- where should I put it?
A: That's always a difficult question without knowing the time horizon involved and your risk tolerance. We believe in long-term, high-quality growth companies, and although we don't invest in more than 25 companies, we do think that those assets should have representation in technology, finance, health care, and a few consumer names -- always focusing on the best-run companies.
Q: How about computer hardware? What do you think about Compaq (CPQ)?
A: We've long left many PC companies, but if we did have an investment in a PC company, our preference would be Dell (DELL) over Compaq (CPQ). Dell has a better business model and higher growth.
Q: Of the 25 stocks you hold, what are some of the standouts you haven't mentioned yet? Anything in financials, for instance?
A: In financials we own many of the usual suspects, such as Citigroup (C), Merrill Lynch (MER), American International Group (AIG), and Schwab (SCH). One of the more unusual names in the portfolio is Harley-Davidson (HDI).
Q: And how well did your strategy work over the last year or so, when so many investors lost out?
A: Our strategy didn't fare much better over the last 12 months. Until September of last year, the leading companies we owned fared better than other second- and third-rate companies, but as we entered the end of 2000 and into the first quarter, the good companies sold off as well.