|
Funds warm up to software
|
 |
May 5, 1999: 11:31 a.m. ET
Small software stocks are down but not out, some managers at conference say
|
CHICAGO (CNNfn) - If there are any unloved stocks in mutual fund these days they are small-cap software companies, managers at a conference here said.
The stocks could be dead in the water later this year after they finish solving so-called Y2K problems. And even without a millennium, identifying the next Microsoft is a tough proposition, managers at Morningstar's mutual-fund conference said this week.
So it came as perhaps a bit of a surprise when a featured speaker, William Miller, manager of the $1.7 billion Legg Mason Special Investment Trust Fund, said he saw some undervalued gems.
"We're finding a lot of software companies with a lot of value," Miller said.
About 1,000 managers and investment professionals are attending Morningstar's 11th annual conference Tuesday and Wednesday.
The Legg Mason fund is the only general equity fund to beat the S&P 500 for each of the past seven years, according to Morningstar. Miller is noted for picking up America Online (AOL) several years ago when the stock was lagging and capturing huge gains for his fund. He's also held Dell (DELL) for many years.
Miller said Legg Mason Special Investment Trust owns Symantec (SYMC) and he's looking at a number of other companies in the sector.
'There's a fair amount of Y2K backlash," Miller said. 'The economics of those businesses are really very good."
Companies that need Y2K help are going to software businesses to "play defense" this year, Miller said, but next year they'll be "playing offense" and will be looking for help in issues such as e-commerce.
A company like Computer Horizons (CHRZ), whose stock has been hammered, also is getting signals about a turnaround, he said. Some of the company's clients already are lining up business for next year, he said.
Some other managers at the conference agreed with Miller and were cautiously optimistic. Many said small-cap software stocks are not that common in portfolios.
Shannon Vanderhooft, a manager at n/i Numeric Investors Funds, said she has a lot of exposure in small Y2K software consulting firms in her Micro Cap Fund. The Boston-based fund group uses computer models to identify stocks with good earnings and other factors.
Vanderhooft said earnings at the software companies in the portfolio have been improving, but the market hasn't been warming up to them, she said.
"People are afraid the companies will suffer when Y2K goes away," she said. But analysts say the companies have good business plans that will carry them beyond the millennium problems, she added.
Some stocks in the portfolio are Cognizant Technology Solutions (CTSH), Complete Business Solutions (CBSI), IMRglobal (IMRS), Progress Software (PRGS) and Melita International (MELI), she said.
Another manager, Jack Fockler of Royce Funds, likes software companies because they're not "capital intensive" and they're service-oriented. Many of the stocks, with the exception of cutting-edge companies, aren't risky.
The Royce Premier Fund owns a stake in Comdisco, a computer-leasing company that services equipment.
Other funds are looking at issues other than the Y2K problem. For example, Mark Yost, a manager at Acorn Funds, said an even bigger concern beyond 2000 is security. The funds own CACI International, a systems integration company for the federal government, and Keane, which handles the same work in the commercial market.
While Yost agrees with Miller's contention about good value in the sector, he said the problem is there are a lot of "one-product software companies" that won't be around in three years.
"There are a lot of good values out there," Yost said. "But there are also a lot of minefields." 
-- by staff writer Martine Costello
|
|
|
|
|
 |
|
