Subject: [NEXTEL-1] Managers Unfazed By Forecast Alarm

From: Marcel <[email-masked]>
Date: Fri, 14 Feb 2003 13:28:43 -0500

http://www.investors.com/editorial/funds.asp?v=2/14

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Friday, February 14, 2003

The Basics:
A collection of IBD stories explaining the fundamentals and pitfalls of investing in mutual funds.

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Managers Unfazed By Forecast Alarm

BY PAUL KATZEFF

INVESTOR'S BUSINESS DAILY

Merrill Lynch is cautioning investors against making big bets on tech, telecom and retail.

That's not the Valentine's message many fund managers wanted to hear. Several managers with heavy weightings in those sectors say they aren't worried.

The real key, the managers say, is stock picking.

"I don't buy shares based on which sector they're in," said Tom Barry, lead manager of $365 million Bjurman, Barry Micro-Cap Growth Fund. "I buy individual companies based on their own merits, regardless of their sector."

Barry says his fund has 29% of its assets in tech stocks.

Merrill Lynch's recent warning stems from its belief that Wall Street analysts' sales forecasts for the three industry categories are overly optimistic.

Consensus predictions of 13.5% sales growth in 2003 consumer discretionary spending are simply too upbeat in view of the brokerage's own forecast of overall 3.8% growth in gross domestic product.

Analysts' forecasts of 3.6% sales growth for information technology and 5.3% for telecom are also too rosy, Merrill Lynch says.

"We've invested in companies that are growing rapidly," Barry said. "They're in niche parts of the tech industry. They serve specific needs that are growing, even if overall tech spending doesn't increase dramatically. But we think it will, too."

One of Barry's niche holding is OmniVision Technologies (OVTI). The firm designs chips for image sensors with uses ranging from games to cameras and security systems.

Earnings per share in the quarter ended Oct. 30 hit 9 cents, a big swing from the year-earlier 1-cent loss. Earnings for the year ending April 30 are expected to grow 322% vs. last year's 57% decline.

Going into Thursday, the stock was up 171% from its Oct. 8 low of 5.39.

Another favorite is Engineered Support Systems (EASI). The holding company provides the military with generators, tank transportation, electronic warfare systems and other gear.

Earnings have accelerated from 24% growth in the April quarter to 41% and 43% the past two stanzas. The stock has IBD's Earnings Per Share Rating of 98.

Shares have climbed 33% from the July 24 low of 27.77.

"Defense Department demand for their services will continue through this (possible) war into the future," Barry said. "It doesn't matter what the economy or dollar is doing."

Cost Cutter

The fund also holds Quality Systems (QSII). The firm provides cost-containment software to medical and dental practices.

Shares are up 48% in the past 12 months. Earnings for the year ending March 31 are seen rising 33%.

"Another reason I'm not concerned about analysts' forecasts is that they're typically based on big companies like Sun Microsystems, IBM
and Cisco," Barry said. "The stocks I'm buying are micro-caps."

Ivan Arteaga and Dmitry Khaykin, telecom analysts for Gabelli Asset Management, say they make recommendations company by company.

Still Stinks

"A lot of the overall telecom sector does still stink," Khaykin said. "But fundamentals in some subsectors are moving up, not down. We look for companies that are growing earnings and cash flow, and selling at a discount to intrinsic value."

The $1.05 billion Gabelli Value Fund and $23.9 million Gabelli Blue Chip Value Fund
each has 13% of assets in telecom, says Morningstar Inc. More than 11% of $1.5 billion Gabelli Asset Fund
is in telecom.

Among regional Bell operating companies, or RBOCs, the Gabelli funds like Verizon (VZ) best.

The firm's weak 55 EPS Rating stems from flat to single-digit quarterly earnings.

But Khaykin says the company's solid local customer base will help it expand into long distance. "And its wireless business has grown nicely," he said. "It's profitable and grabbing market share."

The analysts also like Pennsylvania local-exchange carrier Commonwealth Telephone Enterprises (CTCO).

"Rural and suburban operators have less competition than the RBOCs," Khaykin said. "That helps their growth prospects."

Fiscal 2002 earnings per share of $2.27 vs. $1.39 the year before helped the stock earn a 91 EPS Rating.

Gabelli funds also like Nextel Communications (NXTL). The firm is seen moving into the black this year after narrowing its loss per share to 15 cents last year.

"They've been able to differentiate themselves with consistent operations," Arteaga said. "They had $2 billion to $3 billion in cash on their books last year. Margins expanded. Top line expanded. And they've been free cash-flow positive for two quarters."

Focus On Guns Or Butter?

For investors in retail, global politics will set that sector's fate, says Frank Gannon, manager of $76 million SunAmerica Focus Dividend Strategy Fund.

"Whether we have war in Iraq and how it affects consumers is the key," Gannon said. "Will we have the so-called CNN effect? That's when people watch television rather than go out and shop. Spending drops. That hurts retail."

Gannon's retail weighting as of Sept. 30 was about 23%.

The $450 million Hennessy Cornerstone Growth Fund rigidly follows formulas in selecting small-cap stocks that meet its valuation and earnings growth criteria. It buys stocks once a year and holds them 12 months.

"So we don't look for stories," said manager Neil Hennessy. "But fewer retail stocks meet our screens. Retail is down to 16.5% of assets this year from 24% last year. That says our formula expects fewer retail stocks to meet our criteria."

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