TCS Daily


"Defensive" Stocks in the NASDAQ

By James K. Glassman - March 14, 2001 12:00 AM

When Wall Street analysts talk about defensive stocks, they usually mean providers of food, tobacco, consumer goods - things that people will buy no matter what the economy is doing. Since this seems to be the season for defensive stocks, you may be looking for companies with a limited downside.

You can actually find a few of them in high tech, according to Jaye Morency and Vinnie Muscolino of David L. Babson & Co., Cambridge, Mass. The two fund managers recently sent their clients a letter entitled, "Technology: Now's The Time for the Stout-Hearted."

This is certainly a time for equity investors to hang tough, and the Babson managers say that software firms are particularly appealing in a bear market. Here's their take: "The software business is less cyclical than most other technology fields, so this group is a defensive way to invest in technology. Moreover, a lot of hardware was sold in 2000 and now it's time to run that hardware and make it productive. That is the job of software."

Morency and Muscolino like Adobe Systems (ADBE), Informix (IFMX), Microsoft (MSFT), Nuance (NUAN), Oracle (ORCL), Sabre Holdings (TSG), and Symantec (SYMC).

I share their interest in software companies, and not just because they may be good defensive stocks. Software is the world's great intellectual property industry. What does that mean? It means that these companies deliver genuine innovations and are paid accordingly. It means gathering a bunch of really smart people together to create something new and special, receiving a copyright or a patent and then selling untold numbers of copies of the invention at a marginal cost that approaches zero. In a competitive world, a copyright is a legal monopoly. Software firms can make particularly good use of this advantage, because the manufacturing and distribution costs are so low.

Software is like the computer chip industry except you don't have to build a factory. It's like the pharmaceutical industry except you don't need FDA approval. It's like Hollywood without the $20 million salaries. You only pay employees big money (in the form of stock options) if your productions turn out to be blockbusters.

Of course, other smart people can come along and copyright something that's even better than your stuff. But for the leaders in this industry, software is a very profitable business. Speaking of leaders, I particularly like three of the companies on the Babson list - Microsoft, Adobe and Symantec.

Microsoft is quite simply the world's greatest technology firm. Its desktop operating systems may seem less important in a Web-centric world, but the company's Windows 2000 is gaining ground as a network operating system for large corporate customers. As for consumers, Microsoft and its family of websites recently surpassed Yahoo! as the second most popular online destination behind AOL, according to Jupiter MediaMetrix. Don't forget that Microsoft also makes the most popular software applications and is making inroads in the wireless and TV set-top markets.

Adobe Systems makes a number of products that help people create, manipulate and transmit digital images. Its Photoshop software is the gold standard for web and offline publishers preparing images for display, and Adobe's Acrobat is ubiquitous on the Web, allowing people and companies to share large documents and other data.

Whenever you see a "Naked Wife" or an Anna Kournikova virus come along, you can almost hear the cash registers ringing for Symantec's anti-virus and security software. Symantec's product line, which includes the trusted Norton brand, allows consumers and corporations to secure, scrub and filter the information in their computers.

Microsoft, Adobe Systems and Symantec are all trading well below their highs and would make great additions to a balanced portfolio. Along with these three tech leaders, more aggressive investors might also wish to consider two companies with limited track records but bright prospects.

Just in time for St. Patrick's Day, two up-and-coming Irish software companies look to be attractively priced and poised for future growth. Ireland, by the way, has emerged as a market-friendly, high-growth, high-tech star of the European economy. So it's no surprise to find two vibrant young software firms on the Emerald Isle.

Riverdeep Group (RVDP) is an educational software company based in Ireland, but it's actually a U.S. education play in the K-12 market. This survivor from the IPO class of 2000 makes Internet-based and CD-ROM educational software that is rapidly gaining ground in American schools. With government spending on education likely to grow, RVDP is largely insulated from the current downturn in tech markets.

Iona Technologies (IONA), also based in Dublin, makes portal software for an increasing number of American corporate customers. Iona's software helps a company make its existing programs web-friendly, so that users can access information via a web browser.

Tech investors may be hoping for the luck of the Irish, but all they really need is patience. These five software companies should reward the stouthearted, otherwise known as long-term shareholders.

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