Tech Stocks: Picks of the Pundits


Got the stock market blues? You're not alone these days, with the tech-heavy Nasdaq index down 24% from its March high. To gain some guidance, we checked in with some of the brightest lights on Wall Street to see what they're recommending and why.

For ongoing guidance, we've established the Info Tech 100 index to track the performance of the top tech companies worldwide.

Daniel P. Reingold

Chief telecom analyst, Credit Suisse First Boston
CATEGORY: Telecom services
STOCK PICKS: AT&T (T), Sprint (FON), Bell Atlantic-GTE (BEL)/ (GTE)

WHY: Daniel P. Reingold, an influential analyst who has been researching the stock market for 10 years, has seen bloody routs before. They don't scare him. ''There have been seven major sell-offs since the divestiture of AT&T in 1984,'' he says. ''Enormous money has been made by people who bought in the face of fear.''

Now, he says, it's time to face down the fear and buy. Among his top picks: bellwether AT&T. The company's stock is off 30% for the year, after it warned that revenues and earnings won't meet projections for the year. But Reingold thinks AT&T's stock, now $35, can hit $84 over the next 12 months. That's because AT&T should see surging revenues from the sale of high-speed Net connections, and it's likely to create a tracking stock for its cable-TV unit.

Reingold thinks Sprint Corp. is another good choice. The company's stock is down 11% this year, largely on concerns that regulators may stop WorldCom Inc. from buying the company. Reingold believes the deal probably will go through--in which case Sprint's stock will be a big winner. Even if it doesn't, Sprint will still be fine because another suitor will swoop in. Reingold expects Sprint's stock to hit $114 within a year, up from $60 now.

The case for Bell Atlantic and merger partner GTE Corp. is based on several factors. Together, they should see accelerating growth as GTE becomes better positioned to sell data services to corporations in Bell Atlantic's eastern territory. What's more, initial public offerings for GTE's Internet unit and the combined companies' wireless business should be a boon for the parent companies. Reingold sees Bell Atlantic's stock going to $99, up from $52, and GTE's stock hitting $113, up from $62.

CHART: Reingold's Picks

Martin Pyykkonen

Telecom equipment analyst, CIBC World Markets
CATEGORY: Telecom equipment
STOCK PICKS: Cisco Systems (CSCO), Juniper Networks (JNPR), Inktomi (INKT)

WHY: The big bet here is on a new generation of telecom equipment based on Internet technology. For decades, telecom companies used private standards created by companies such as Lucent Technologies Inc. and Nortel Networks Corp. Now they're adopting the open way of the Web. Pyykkonen expects telecom carriers such as WorldCom and AT&T to boost spending sharply on so-called Internet protocol equipment within six months.

His picks are poised to take advantage of that growth. Consider Cisco Systems Inc., a pricey stock at 115 times earnings, compared with an average of 24 for the Standard & Poor's 500. He thinks the company can hold on to at least 75% of the high-end router market as the market grows from $1.7 billion this year to $12 billion in 2003. That should help boost the company's stock, now at $58, to $75 in a year. Another company that will benefit from growth in the high-end router market is Juniper Networks Inc. Pyykkonen thinks the second-largest player could increase its market share from 18% now to 25% over the next year or two. He expects the company's stock to rise from $162 to $300 within a year.

Inktomi Corp. is an unconventional stock pick for a telecom equipment analyst, since Inktomi is a software company. But Pyykkonen thinks telecom players will increasingly buy software along with their traditional network gear. Inktomi derives 40% of its revenues from its search-engine technology, which is the guts inside Yahoo!, MSN, and other search sites. The rest comes from software that helps carriers such as AT&T distribute Web traffic in a faster, more efficient manner. Pyykkonen thinks demand for the latter is going to soar in the years ahead--and with it Inktomi's stock--to $150 over the next year, up from $128 today.

CHART: Pyykkonen's Picks

Rick Sherlund

Managing director, Goldman, Sachs & Co.
CATEGORY: Software
STOCK PICKS: Oracle (ORCL), Siebel Systems (SEBL), Amdocs (DOX)

WHY: In an uncertain investment market, Sherlund says, stay with the big names. While putting money on smaller Internet companies may lead to big payoffs, it's just too risky right now. Sherlund's favorite big boys of business software can give investors a taste of Net valuations without the fear factor.

Sherlund's first pick, Oracle Corp., is the poster child for big companies that ''get'' the Internet. ''It's not exactly a name that's undiscovered, but it's a very good name,'' he says. Oracle, now trading at $71, has what every e-business needs--database packages and programs for linking businesses together. That helped revenues jump almost 17%, to $9.7 billion last year. The risk? Oracle's big-ticket sales sometimes fluctuate, leading to unpredictable quarters, says Sherlund.

Siebel Systems Inc., Sherlund's second favorite, is among Oracle's chief rivals. Siebel makes big, companywide software for managing and forecasting sales. Like Oracle, it has made the leap from old, back-office technologies to the Net. Siebel's revenues jumped an eye-popping 103%, to $959 million last year. It has done even better on Wall Street. While Siebel's stock is off its $175 high-water mark for the year, it has settled around $120, up more than six times from its 52-week low of $18.

Sherlund calls his third pick, Amdocs Ltd., his ''favorite stock of the year.'' Another fast-grower, Amdocs makes billing software for telecom companies and, more important, for Internet service providers. ''Somebody needs to do all the billing for these services,'' he says. Amdocs' revenues jumped nearly 70%, to $854 million last year. With Amdocs trading around $60 after hitting $96 less than three months ago, Sherlund smells a bargain.

CHART: Sherlund's Picks

Henry Blodget

First vice-president, Internet analyst, Merrill Lynch
CATEGORY: Internet
STOCK PICKS: Yahoo! (YHOO), America Online (AOL), Inktomi (INKT)

WHY: With the shakeout among Net companies, the profitability and established positions of these three make them top picks, Blodget says. He expects Net stocks to drop even more this summer, before the strong rally this fall. ''If you own these stocks, hold on to them,'' Blodget says of his picks. ''If you want to add to your holding, you should get a good opportunity this summer.''

Yahoo! Inc., which dishes up free services such as e-mail, auctions, and news, will continue to benefit from broad, global reach. Revenues from e-commerce and communications, including long distance service, should increase to 67% of total sales within three to five years from 20% now, Blodget says. Advertising will make up the rest. Yahoo's 23 international versions, which now account for 14% of sales, also will boost growth and reach 50% of sales in five years. By yearend, Yahoo's stock will climb back to $200 from $137 today.

Can AOL, a monster with 22 million subscribers, pull off its $183 billion merger with Time Warner Inc. and become the world's most valuable company? Yes, within two years, Blodget says. ''AOL will lead and benefit from changes in music, cable broadband, and new devices, like interactive TV,'' he says, and by yearend, he adds, the stock will be around $80, up from $55 now.

Inktomi Corp. was in the right place at the right time, Blodget says. A year ago, demand for its Traffic Server software, used to efficiently distribute content, seemed limited to a small group of companies, he says. The exploding popularity of media and music brought in new clients in the past six months. Now Traffic Server sales are increasing by about 40% each quarter. That should help push the stock to $175 by yearend, from $128 today.

CHART: Blodget's Picks

Karl Keirstead

Consultant services analyst, Lehman Brothers
CATEGORY: Services, distributors, and resellers
STOCK PICKS: Scient (SCNT), Viant (VIAN), Razorfish (RAZF)

WHY: Keirstead likes the stocks of the new Internet consultancies because they're profitable and they have strong management teams. Above all, he likes the revenue growth they get from focusing exclusively on the Web. ''These companies are growing the most and the fastest,'' Keirstead says.

No consulting firm is growing faster than top-pick Scient Corp., a two-year-old San Francisco firm that helps devise Net strategies and develops Web sites for its clients. Revenues are projected to grow 120% this year, to $350 million, while net income is expected to hit $19.8 million. One major reason is that Scient's management is chock-full of top-drawer execs from IBM and AT&T. The strong leadership has helped attract some of the best strategic minds in the Web business and some marquee clients, including Chase Manhattan Corp. and Web auctioneer eBay Inc. ''Scient right now has its pick of the litter when it comes to clients,'' says Keirstead. He expects the stock to more than double, from $47 now to $100 over the next year.

Keirstead also is sweet on Viant Corp., another Net consultancy. It has a ''terrific reputation for on-time, on-price delivery,'' Keirstead says. That has helped attract big-bucks clients--such as PC giant Compaq, phone-equipment maker Lucent, and photocopy king Kinko's. It also should help net income hit $16.6 million this year, up from $1.4 million last year. Says Keirstead: ''When you ask private e-business consulting players what they want to be when they grow up, most identify Viant.'' He expects the stock to hit $50, from its current $23.

Keirstead's third choice is New York City-based Razorfish Inc. He says the five-year-old firm has the vision thing. It was the first e-consultancy to expand into overseas markets--40% of its revenues come from Europe. And it was one of the first to see the move to wireless Net applications. Such foresight should help the firm boost net income to $22.6 million this year, compared with $16.6 million last year. Keirstead thinks the $16 stock could nearly triple over the next year, to $40.

CHART: Keirstead's Picks

Charlie Wolf

Executive Director, UBS Warburg
CATEGORY: Computers and peripherals
STOCK PICKS: Apple Computer (AAPL), Gateway (GTW), EMC (EMC)

WHY: Thanks to the return three years ago of CEO Steve Jobs, Apple Computer Inc. is hot again. Now, to complement its candy-colored computers, early next year Apple plans to roll out a new operating system. It should more easily handle multitasking and will feature a ''stunning'' redesign that includes translucent scroll bars and drop-down menus that show what's on the window behind, Wolf says. With software developers planning to release new versions of their programs at the same time, Mac users will want to upgrade to the new operating system--boosting revenues by nearly $150 million next year, Wolf says. ''Revenues won't look like much, but with gross margins close to 100%, the contribution to the bottom line will be enormous,'' he says. Apple's stock, trading at about $84, will slide by $100 ''like a knife through soft butter'' and could hit $150 within 12 months, Wolf says.

He's betting Gateway Inc. will prosper because of its unique ability to sell lucrative services such as training and Internet access along with PCs. While Gateway sells directly to consumers over the phone and the Web, it has a ''killer'' distribution channel in its Country Stores. There, customers can ask questions and try out machines, but they place their orders online so the stores don't carry costly inventory. Best of all, store sales are more likely to include services and other extras such as extended warranties and financing, which generate operating margins north of 20%, compared with 7% for hardware. Wolf thinks Gateway's stock, now about $50, could hit $80 over the next year.

Outside the PC arena, Wolf likes EMC, a maker of storage systems for computer data. Its ''storage and only storage'' focus has allowed it to extend its technological lead over such rivals as Sun Microsystems, Hewlett-Packard, and IBM. At the same time, the rise of the Net has made storage strategically important. ''A company like eBay must be up 24/7, and the reality is, the one company that can guarantee it most is EMC,'' says Wolf. He predicts the company's shares, now trading at about $67, could hit $83 within 12 months.

CHART: Wolf's Picks

Charles F. Boucher

Analyst, Bear, Stearns & Co.
CATEGORY: Semiconductors
STOCK PICKS: LSI Logic (LSI), Texas Instruments (TXN), National Semiconductor (NSM)

WHY: Semiconductor stocks, like the rest of the tech sector, haven't had an easy time since March. Many chip stocks have tumbled by a third in the past few months, and a few, including Conexant, have plunged as much as 70%. Bear, Stearns analyst Charles F. Boucher acknowledges that ''investors had gotten ahead of themselves'' this spring, but now he says it's time for another look.

A favorite is Milpitas (Calif.)-based LSI Logic Corp., which makes chips for networking equipment, servers, and consumer devices such as set-top boxes and video cameras. LSI ''sells into fast-growth markets linked to the Internet,'' Boucher says. LSI's advantage, he says, is that it's a leader in jamming various computing and communications functions directly onto the chip. Those added applications typically require more proprietary features to be embedded on the silicon, which makes for higher margins. Boucher expects LSI to more than double its share price, to $100, in the next 12 months. ''The only reason you wouldn't buy this stock today is if you had any serious reservations about the semiconductor industry and the markets it serves continuing to grow,'' Boucher says.

Another solid choice, Boucher says, is Texas Instruments Inc. In the past several years, Dallas-based TI has eliminated less profitable product lines, such as memory chips, and has focused on digital signal processors. These are chips found in nearly every modern product, from cars to cell phones to Furby toys. Boucher has a 12-month target price for TI of $100, up from $72 today.

Perhaps Boucher's riskiest pick is Santa Clara (Calif.)-based National Semiconductor Corp. The company took a beating in the mid-'90s, after it bought PC-chipmaker Cyrix Corp. and took on industry giant Intel. Now, following the sale of Cyrix and a $688 million special charge to clean up the damage, Boucher believes National's managers have ''learned from their transgressions.'' He expects the stock to double to $105 in the next year. The risk? National could ''get wanderlust again'' and make another acquisition like Cyrix, ''but I don't believe it's likely,'' says Boucher.

CHART: Boucher's Picks

Nikos Theodosopoulos

Managing director, UBS Warburg
CATEGORY: Networking equipment
STOCK PICKS: Nortel Networks (NT), Tellabs (TLAB), JDS Uniphase (JDSU)

WHY: Here's an irony for you: Telecom equipment analyst Martin Pyykkonen of CIBC Oppenheimer (see page 128) is recommending networking stocks, while networking analyst Nikos Theodosopoulos picks telecom companies. But it's a fair reflection of where the communications market is headed these days. Cisco Systems and Nortel Networks are invading each other's turf, and everybody is hawking so-called Next Generation gear that uses Net technology to transport data, voice, and even video traffic.

Theodosopoulos believes in Nortel precisely because it's doing a good job of spanning those two worlds. Once mostly a maker of giant phone switches, Nortel acquired Cisco rival Bay Networks in 1997. Bay has helped Nortel grab an even bigger share of the white-hot market for optical Internet gear, where it holds the No. 1 position and from which it derives about 30% of its $24 billion annual revenues. Nortel also is gaining ground in wireless equipment. Theodosopoulos sees revenue growth accelerating this year, to 32%, from 26% last year, while more efficient sales and manufacturing should boost operating margins a point, to 11.5%. He figures the stock, now at $60, will climb to $75 by yearend.

A more controversial pick is telecom equipment maker Tellabs Inc. Theodosopoulos thinks its upcoming optical product will be a clear winner. Due in the second half, the box will manage traffic hand-offs between the giant fiber-optic rings that make up the backbone of the phone system--where Tellabs is already No. 1. That should help drive its stock, now $66, to $80 by yearend.

Rounding out his top picks, Theodosopoulos recommends JDS Uniphase Corp., a 1999 stock-market darling that still has upside potential. The No. 1 maker of components used in optical products, JDS saw its shares soar more than sixfold in the past 12 months. The future looks bright because that multibillion-dollar sector is on track to grow an additional 75% to 100% this year. JDS has the broadest product line and strongest management team in the business, Theodosopoulos figures, so its shares could rise an additional 18% by yearend, to $130.

CHART: Theodosopolous' Picks