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Marsico Bullish on Tech Stocks
Tuesday October 26, 7:00 am ET
By Christopher Davis


Last week, we discussed the ongoing woes of large-cap growth stocks. They were among the great losers of the bear market, and then proved to be laggards in 2003's rebound. Their misfortune has continued into 2004, with the typical large-growth fund down more than 3% so far this year.

We've also highlighted some reasons the group could be due for a comeback. Large-growth stocks look relatively attractive compared with the rest of the market on a valuation basis. They also tend to perk up as economic rallies mature and investors turn their attention from fast-growing speculative names, which tend to rally early in the recovery cycle.

We highlighted a few large-growth manager favorites last week. We'll continue on the same theme this week by offering a sampling of what two prominent large-growth managers told our analysts recently about the names that are grabbing their attention.

Marsico Gets Bullish
Tom Marsico, the highly successful manager of namesakes Marsico Focus (Nasdaq:MFOCX - News) and Marsico Growth (Nasdaq:MGRIX - News), has built one of the best long-term records of any large-growth manager. (Marsico also headed up Janus Twenty (Nasdaq:JAVLX - News) to much acclaim). These days, Marsico has become increasingly bullish on stocks. Even though interest rates are likely to rise, they remain historically low. And when you compare the earnings yields on stocks to that of the 10-year Treasury bond, Marsico says stocks look appealing.

That optimism extends to racier growth areas, which have slumped in recent months. As such, Marsico has been boosting both his funds' technology stakes, putting money to work in names like Dell (NasdaqNM:DELL - News) and Electronic Arts (NasdaqNM:ERTS - News). He's also a fan of Qualcomm (NasdaqNM:QCOM - News), which he likes for its third-generation wireless technology. He also points to the company's high margins on its royalties business, which translate into strong cash-flow generation. Even so, both funds' technology weightings remain on the low side. Marsico still isn't excited about corporate IT spending, which puts a damper on the outlook for many tech names. But he recognizes that corporate balance sheets are perhaps as healthy as they've ever been, and CEOs could be keeping their powder dry until political and economic uncertainties subside.

Marsico has played the tech theme in indirect ways as well, homing in on companies that are using technology to better their businesses. For example, top holding UnitedHealth Group (NYSE:UNH - News) harnesses technology to achieve cost leadership. He also counts FedEx (NYSE:FDX - News) and eBay (NasdaqNM:EBAY - News) as tech-related favorites.

Hagstrom Looks to Networks for Sustainable Growth
Legg Mason Growth (Nasdaq:LMGTX - News) manager Robert Hagstrom isn't as well known as colleague Bill Miller, the famed manager of Legg Mason Value (Nasdaq:LMVTX - News), but he's made a strong case for his more-aggressive take on Warren Buffet-style investing.

Hagstrom believes that pricing power in the U.S. will become increasingly scarce, thanks to advances in productivity and technology that makes prices more transparent. As a result, Hagstrom has glommed onto companies that can deliver sustainable unit growth. Those firms, he has found, are often beneficiaries of the "network effect," which means they offer services or products that become exponentially more valuable as more they gain more users (think of Microsoft Windows as an example). When successful, such companies offer rapid sales growth without the need for heavy incremental investment and impose heavy switching costs for customers.

As an example of a firm that benefits from the network effect, Hagstrom cites Nextel Communications (NasdaqNM:NXTL - News), whose push-to-talk technology fosters interaction amongst subscribers. These customers' reluctance to leave the network only grows as more friends and colleagues join. Another example is eBay, which Hagstrom sees as a global network whose success attracts even more users while making markets more transparent and efficient.

http://biz.yahoo.com/ms/041026/118607_1.html