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http://www.smartmoney.com/smt/funds/index.cfm?story=199909271

September 27, 1999 So Long, Y2K By Mark McLaughlin

REMEMBER THE software industry? Those makers of lines of code that bring computers to life. Well, Y2K-inspired fears of a lockdown in technology spending have relegated many of those companies to the sidelines for most of the year. But as one firm after another assures Wall Street that it can interpret the digits 00 just fine, the somnambulant sector is waking up.

Analysts are already preparing for the party. Just listen to what Salomon Smith Barney software analyst Neil Herman wrote in a note earlier this month: "It's time to back up the truck and load up on the software sector." And this morning Herman wrote, "Overall software spending is likely to be very strong over the next 12 months. The two biggest winners from a software purchasing perspective are in order of strength, Microsoft (MSFT) and Oracle (ORCL)."

Like analysts and fund managers, Herman believes the sector with greatest potential is the so-called enterprise software group. These are companies like Oracle, Peoplesoft (PSFT) and BMC Software (BMCS) that sell corporate software systems that do things like organize accounting and sales departments. These software makers were hit the hardest as companies cut back spending to solve their Y2K problems. But now these stocks have begun bouncing back. Peoplesoft is up 21.8% this month and BMC Software has gained 20.7%.

"They made a nice move recently but there is still a lot more to them," says Marc Klee, manager of the $402 million John Hancock Global Technology (NTTFX) fund, which has a 14% software weighting.

For investors who want a diversified way to play the recovery in software, we screened the Morningstar database for top-performing mutual funds with at least a 20% software stake. We eliminated funds with sales loads and higher than average expense ratios.

Berger Information Technology Berger Information Technology (sorry, no snapshot available) manager Bill Schaff isn't just another fund manager. Besides being chief investment officer of Bay Isle Financial, which Berger hired to run its new information-technology fund, he's also a trade journalist, writing a column for Information Week and editing the Web site TechWeb. Thanks to the latter job, he's always up-to-date on what information technology managers (the folks who actually order the software) are up to. What's he hearing today?

"[IT managers] are still testing [for Y2K compatibility] until the end of the year. But they are now starting to build up a backlog of orders for 2000," he says. "That's a sign of strength in the sector and will accelerate in the fourth quarter."

Schaff's fund, up 52.7% in the last year, trailed its tech peers by 18 percentage points through August largely due to its 40% weighting in software stocks. But that handicap is now turning into a boon. The fund is up 9.3% this month, compared to 1.4% for the average tech fund on the strength of top holdings BMC Software and Oracle.

Some of Schaff's favorite picks today are enterprise software makers Compuware (CPWR) and New Era of Networks (NEON). He bought Compuware most recently in August at around 26. The stock is now at 27, and is still 30% off its 52-week high. NEON took a nosedive in July when it announced it would miss second-quarter earnings estimates. As high as 67 earlier this year, Schaff grabbed NEON at 16 and has seen it rise back above 20. The company is one of the early companies in the hot space of enterprise application integration software, or EAI, which helps businesses do things like connect e-commerce activity to their internal computer systems.

Northern Technology Northern Technology (NTCHX) fund manager George Gilbert has more than a third of his winning fund invested in software and services stocks. (The fund has a three-year average annual return of 48.3%, ranking in the top 6% of tech funds.) Among those holdings, Gilbert likes Siebel Systems (SEBL) and Electronic Arts (ERTS), which represent 0.3% and 2.4% of the portfolio, respectively.

Siebel, which makes customer relationship management software for tracking customer data, hasn't suffered an instant from a Y2K slowdown. Its software licensing revenue was up 80% last quarter, and the company has beat earnings estimates for each of the past four quarters. Still, the stock is 11.6% off its 52-week high. Analysts expect the company to increase its earnings at a 45% rate, which is twice the software industry average. Yet Siebel's forward P/E is 62, just 38% more than the group average.

When Gilbert looks at video game producer Electronic Arts, he sees an instant replay of portfolio holding Intuit's (INTU) successful migration to the Internet. Intuit, maker of Quicken financial software, has seen its stock double in the last 12 months as its Web site, Quicken.com, has gained popularity.

Electronic Arts already has one online game product, Ultima, which has 125,000 subscribers. And it plans to roll out five more over the next 12 months. As it does, Gilbert expects the company's P/E to rise above 40 and perhaps reach the heights of other Internet stocks like Intuit, which has a forward P/E of 58. Right now, Electronic Arts is selling at 32 times expected year 2000 earnings of $2.17.

T. Rowe Price Science & Technology This fund has soared an astonishing 100.6% over the past year. But believe it or not, that's just in line with the category average. And over the past three years, T. Rowe Price Science & Technology's (PRSCX) 31.8% average annual return ranks in the bottom 10% of all tech funds. But manager Charles Morris is betting that big positions in Microsoft, Oracle, BMC Software and Intuit will help the fund leap ahead this year. All told, the fund has a 23.5% stake in software and services. One of its biggest winners in the field has been No. 3 holding Adobe Systems (ADBE). The maker of publishing software is up 136% since the start of the year and 219% in the last 12 months on the strength of earnings surprises.

\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/ What I get out of this is that all their hopes are on past earnings with no forward fears!

Are their's rose colored glasses or blinders, or opaque glass?

Robert

-- Same as B4 (NWphotog@Foxcomm.net), September 28, 1999

Answers

People ought to go to jail for advice like this.

-- Peter Errington (petere@ricochet.net), September 28, 1999.

Great investment advice (just remember what happens to a fool and his money...).

-- Mad Monk (madmonk@hawaiian.net), September 28, 1999.