Managed Money Reporter Newsletter — Issue 157, March 2000


Editors: Carl Spiess & Allan McGlade


Featured Articles



The "new" economic paradigm– How real is it?

We recently have been receiving analysis that suggests that technology stocks are overvalued. Here is a particularly good article from Trimark.

Technological change isn't new. What's now obsolete was once on the cutting edge of change - as anyone who had an eight-track car stereo will tell you. And today's hot items and sectors will one day become old hat or antiquated, too.

In his nearly 35 years of investment management, Trimark chairman and chief investment officer Bob Krembil has seen plenty of tech changes, including the introduction and development of the:

  • Microprocessor (he invested in Intel in the mid-1970s)
  • Personal computer
  • Cellular phone
  • Biotechnology industry
  • Internet
  • Field of genomics

As revolutionary as each of these technologies is or was, the stock of companies involved with the products or concepts have experienced boom and bust cycles - except, as yet, many of the Internet outfits. Think back to the crash of computer and chip stocks in the 1980s. The bear market for biotech in the early 1990s.

Are there obstacles to unbridled Internet growth? International IT consultants the Gartner Group make a case that unproven technologies, business models and unready markets stand in the way of a smooth transition from traditional "bricks and mortar" enterprise to e-commerce. Gartner predicts there will be failures before the truly productive companies survive.

Gartner Group's Hype Cycle

Still, investors have been valuing new so-called dot.coms on generous expectations. Barron's noted in a December 13, 1999, article that, of 1999's record number of IPOs, about half were related to the Internet, and a significant number of these companies had little in the way of revenue, let alone profit.

And there's the peg on which the "new paradigm" claimants hang their hats. The counter-argument to valuation concerns centres on the new paradigm claim that the current technological revolution is the most profound change in business and society since the Industrial Revolution.

No doubt, it is significant. But you have to wonder about the droves of new Internet companies that are coming to the market, and the vast majority that are bid up on unrealistic expectations. The market is essentially saying, "Company.com X - and each of its competitors - will be the next big thing."

Realistically only the top companies survive

But realistically only the top companies will remain in business, and competition will ensure that returns for the "survivors" diminish over time. As the dance floor becomes increasingly crowded, it becomes more difficult to show your moves.

Currently, it is a bet to try to guess the companies that will have the best management, the largest market share and the highest profits. Betting is not investing: Not every Internet IPO will be the next Microsoft.

Evidence to support this can be found in recent history. Some IPOs that started out with a bang have ended up a bust.

Recent IPOs

To understand the optimism priced into some tech issues, take the case of a recent addition to Trimark Fund and Trimark Select Growth Fund, W.W. Grainger Inc. Grainger is one of the largest suppliers of industrial products in the United States. Starting in the mid-1990s, the company began to rethink its business model to incorporate e-commerce as a means of reducing costs for both itself and its customers.

A quick comparison of Grainger to e-commerce firm Commerce One, Inc. - a business-to-business Internet company - reveals the following:

Grainger* Commerce One*
Market Cap: $4.3 billion
Sales: $3.4 billion
Internet Sales: $160 million
Profits: $152.6 million
Market Cap: $14.3 billion
Sales: all Internet) $16.7 million
Loss: $34.5 million

* (Figures are for the nine months ending September 30, 1999; market cap at January 10, 2000)

The market values Commerce One at three times Grainger, despite the latter's significant customer base, profile in its industry (the company's been around since 1927) and its profits being 10 times Commerce One's sales. The management team at Grainger is top-notch. It foresaw the power of the Internet and made sure capital and resources were dedicated to leverage its potential. If e-business becomes business as usual, then it is companies like Grainger - that already control customers - that will benefit from the Internet revolution. At Grainger, it's already happening: Internet sales have increased 1000 per-cent over 1998's figures, and Grainger has one of the most trafficked business-to-business Web sites.

Assessing change and impact

So it is the mark of a true investor to assess change and understand how it will impact the way things are done today and in the future. This assessment is neither reverential nor skeptical: Rather, it is an honest attempt to think independently and identify true opportunities.

In a rare comment on the markets, Warren Buffet (Fortune magazine, November 1999) mused over the valuations of stocks today - and addressed the issue of "things being different this time." While admitting that investors ignore the current technological revolution at their peril, he pointed to two other technological changes that fundamentally altered life in the 20th century: automobiles and airplanes. But after several decades, only the companies with a competitive advantage had survived. And even these once-revolutionary businesses had not been the most generous to investors. So, good ideas don't necessarily make for good stocks.

Trimark knows investment is about risk and reward

This is why Trimark understands that investing is about risk and reward. Our investment style has worked through booms and busts in technology and other areas of industry because we build cases across the entire market for well-run businesses with good growth prospects and sensible valuations.

Avoiding faddish manias and speculative bubbles means avoiding the risk of large losses that come when bubbles burst. Never forget that an investor feels twice as bad experiencing a loss as they feel good with a gain. Keeping clients happy with their investments helps us all prosper.

We've provided clients with superior long-term returns by digging deeper to uncover opportunities others have over-looked, and paying attention to what we pay for them. This style has worked exceptionally for the 35 years Trimark chairman and chief investment officer Bob Krembil has been in the investment management business. We believe it will continue to provide superior long-term performance going forward.

Copyright Trimark Investment Management Inc. 2000. Used with permission.

Fund News

Dynamic Infinity International Fund has changed its name to Dynamic Infinity American Fund.

Fidelity has introduced eight new RRSP-eligible foreign funds:

  • Fidelity RSP European Growth
  • Fidelity RSP Far East
  • Fidelity RSP Focus Financial Services
  • Fidelity RSP Focus Healthcare
  • Fidelity RSP Focus Technology
  • Fidelity RSP Growth America
  • Fidelity RSP Overseas
  • Fidelity RSP Japanese Growth

 



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