TCS Daily

Diversify with Tech's Leaders

By James K. Glassman - April 26, 2001 12:00 AM

Jack Welch, the retiring CEO of General Electric, may be the greatest corporate manager of all time. I'm not comparing him to inventors or entrepreneurs who created great things out of nothing, but as a manager who can run a business, develop talent and consistently squeeze better results out of a seemingly mature industry.

As an investment strategist, the late Benjamin Graham, the late Columbia University professor and money manager, is probably the greatest in his field. He's inspired generations of investors, including the brilliant Warren Buffett, who has used a modified version of the Graham approach to amass his roughly $30 billion fortune.

Welch and Graham each have an important lesson for today's investors, especially for those wise shoppers looking to buy a stock for the long term. Welch had a consistent (and successful) way of looking at the numerous markets in which his conglomerate operated. Said Welch to his lieutenants: Be number one or number two in an industry, or get out! He believed that if a GE division could not be one of the leaders in its market segment, it should be sold.

Graham, for his part, had a consistent (and successful) approach to evaluating potential investments. He used to say: Don't think of yourself as a shareholder, but as a partner in a business. In other words, don't just buy a stock; buy a part of a great business.

I think that both Welch and Graham were saying that there are so-so businesses, and then there are great businesses, and it's better to own the latter. Leadership matters. The dominant players in a market earn the fattest margins. They're usually the best equipped to weather an industry or economic downturn. As Damon Runyon once said, "The battle is not always to the strong, nor the race to the swift - but that's the way to bet." I'm all for diversification and it's great to include a few scrappy underdogs in a balanced portfolio, but it's also important to recognize the power of a large, well-managed, financially healthy firm.

Right now, there are four great tech companies still trading well below their highs. These four companies have terrific balance sheets, little or no debt, a history of fast earnings growth and they are the clear leaders in their respective markets. If you can look beyond the recent carnage in tech markets, it's not difficult to see that these markets will continue to grow, and that these four companies stand to receive a large share of industry profits:

Cisco Systems (CSCO) Orders have been drying up lately, the economy has slowed and Cisco needs to get ahead of the curve technologically, but let's keep things in perspective. In the most recent twelve-month period, the year of the tech wreck, Cisco increased its earnings by more than 20%. This company has no long-term debt and a leading position in a huge market. It stands to gain from a downturn as its competitors fall by the wayside.

EMC (EMC) The king of data storage. According to the company's website, "More new information will be created over the next two years than over the entire history of humanity - more than 90 percent of it digital." I can't vouch for the accuracy of this statement, but in an age of information, with increasing numbers of broadband video applications moving to digital networks, it's not out of the question. And EMC is the company most likely to benefit from this trend.

Microsoft (MSFT) The world's greatest software company has no debt, piles of cash, and an amazing track record: average annual earnings growth of 35 percent in the last five years. Looking to the future, Windows is starting to take a big bite out of the high-end corporate network market. Bad news for Sun Microsystems, good news for MSFT shareholders. Best of all, Microsoft managers know they can't rest on their laurels. They understand that their business is constantly changing. Microsoft took a big political hit last year. Now, it is likely to win its appeal of an unwarranted federal antitrust case.

Nokia (NOK) Things are tough all over the tech landscape, but the Finnish portable phone giant just beat expectations for its most recent quarter, posting double-digit gains in sales and earnings. And Nokia is putting an even bigger beating on the competition - increasing its market share lead over stumbling rivals like Ericsson. Sure, 50 percent growth in cell phone markets is probably a thing of the past, but does anyone think that more people and applications won't be going wireless?

These four companies could serve very well as the technology share of a balanced portfolio.


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