"A Great Number Of Names Are Untouched"
Spotting up-and-comers in the booming telecommunications and media industries has been a winning pursuit for Oscar Castro. A longtime international stockpicker who manages the six-year-old Montgomery Global Communications fund, Castro has peppered his portfolio with such big players as Nokia, Vodafone AirTouch, and Nippon Telegraph & Telephone, along with a variety of names that are anything but household words. The recipe has resulted in a 53.4% total return through Nov. 11, after a 55% gain in 1998. Castro chatted in his San Francisco office recently with Senior Editor William Glasgall.
Q: Why look globally for telecom plays?
A: The next wave of investment will go into international markets. A great number of names are untouched. Go to Ireland, and you'll find Esat Telecom Group, the second-largest provider of telecom services in the country. They have a very strong strategy and a strong cellular franchise, plus long-distance and local access. They're small but growing very fast and trade at a multiple that's close to half that of Vodafone Airtouch, the largest cell-phone operator in the world. We also like Helsingin Puhelin [a Finnish telecom company] and Libertel in the Netherlands, a Vodafone associate.
Q: What about equipment makers?
A: It's like choosing horses out of a stable. Every one is fed and trained the same way, so you bet on the companies that have won before. That means Nokia, Ericsson, Nortel, and Lucent. These companies trade at such high multiples that you may have to ride them for a while--Nokia trades at 50 times next year's [estimated] earnings. But Nortel may create major surprises. It has the ability to provide wide-band CDMA infrastructure: switches, transmitters, towers.
Q: What's wide-band CDMA?
A: It's third-generation technology. By mid-2001, we'll all be buying [wide-band CDMA] phones that will allow Web access and transmission.
Q: Besides Nortel, how are you playing this?
A: Sprint PCS is selling Web phones. It is far ahead of the pack. AT&T will not be far behind. Mannesmann will also be in the forefront. So will NTT--and it's much cheaper than NTTDoCoMo [its mobile-phone subsidiary]. But it's a risk--a mammoth company going through restructuring.
Q: Bernie Ebbers just merged MCI WorldCom with Sprint. How do you feel about him?
A: Talk to a lot of people and you'll find them crazy, fanatical about Bernie Ebbers. I'm no different. He has gone from being the fourth-largest long-distance provider in the U.S. to one of the largest telecom operators in the world. He keeps shareholders in mind--he makes acquisitions that are not dilutive. Why did he do the latest acquisition? He needed a wireless strategy and didn't have one. The company will trade at 13 times next year's [estimated] operating cash flow after the merger with Sprint. But I expect cash-flow growth to be in the mid-20% range.
Q: How about Web plays?
A: Excite@Home is a great company. Freeserve--it's the AOL of Britain. It's one of the very few independent Internet service providers in the international arena. And Amazon.com is trading at 75, vs. 85 a few weeks ago. But when it reports its December quarter and revenues have gone up big-time and it's really making money from all those new businesses, people will see what it's doing. I am fanatical about it. I buy books, CDs, and DVDs from it, and now, I'll have to buy toys for my son, Alejandro.