Barrons: 寻猎科技股 ---- 广义定义法

The Hunt for Tech Stocks, Broadly Defined
Zack Shafran, Portfolio Manager, Waddell & Reed Advisors

AN INTERVIEW WITH ZACK SHAFRAN: Tech opportunities in unlikely places.

AS A KID GROWING UP IN KANSAS CITY, Mo., Zack Shafran fell in love with the concept of investing -- or, rather, with the idea that someone would want to send him checks every quarter for doing nothing. Years later, at the University of Missouri at Kansas City, as an undergraduate and graduate, he focused on business, planning to leave home later. But "good things always came up to stop me, and I never did," he recalls. After a stint in the research department of a small regional brokerage, he spent two years as an investment advisor at another regional firm. He then joined Waddell & Reed as an analyst, focusing initially on conglomerates and health care, and later on science and technology, before moving up to manage money for the firm in 1996.

Today, as the manager of both the Waddell & Reed Advisors Science & Technology Fund (ticker: UNSCX) and the Ivy Science & Technology Fund (WSTAX), he has about $3 billion under management, and his investing scope is unusually wide. Unlike his peers, he focuses not only on pure tech but also on companies using science and technology to get ahead no matter the industry they're in. The strategy has paid off handsomely. The $978 million Ivy fund's annualized three-year return through Oct. 31 is 4.54%, versus the Standard & Poor's North American Technology Sector's minus 0.06%.

We spoke to him by phone as he was about to take some time off with his family at his nearby nonworking farm, a haunt where he loves to relax, hunt and fish.

Barron's: Tell us about this wider-than-usual scope you adopt?

Shafran: I think there is too much opportunity not to look beyond pure technology. In markets around the world, maybe 25% to 30% is directly related to science and technology -- but on top of that, there are maybe as many companies using science and technology to dramatically change their business. It's such a broad view that it's important for us to have a litmus test; if I can't explain in about 60 seconds why technology is important, then there's something wrong. I try to limit myself to maybe 45 to 65 stocks. And I make no attempt -- so don't ask me -- to predict technology or the market as a whole.

OK on the big picture. But I would have thought that just about every company in the world uses technology in some way to get ahead.

Very true but, for me, technology not only has to have the potential of impacting the bottom line, but there also has to be a perception by investors that science and technology will play a meaningful role in the business and can drive the stock price. Let me give you an example. Wal-Mart is an incredibly large, effective innovative user of technology. Having said that, I don't foresee ever owning shares of Wal-Mart, because I don't think technology is ever going to impact Wal-Mart's stock significantly. I have top-down themes but, at the end of the day, everything is about the portfolio putting itself together as a compilation of what I think are really good investment ideas.

So when you drill down past technology, what are some of the areas you end up looking for opportunity in?

One example could be alternative energy. I wouldn't consider it classic technology, but I do think there is a long way to go where technology can boost opportunity.

Another could be agriculture. I have had exposure to and continue to have exposure to some companies in the agricultural arena, companies where it's more about the implementation of technology for sustainability purposes, for efficiency purposes, than it is just about agriculture.

Another area I'm keeping an eye on is batteries, one of the huge remaining limiting factors when it comes electronic mobility and miniaturization. But I haven't yet found a play here. I have to remind myself that just because I find a good or interesting company, that doesn't mean it's going to be a good stock.

What do you consider a good stock at the moment?

An area I don't think is getting enough attention is water, which is going to be a greater future crisis than the periodic oil shortages we have seen. And I am talking not only about the availability of water, but also the availability of clean water.

The company here I like is Pentair [PNR], which is perceived by the markets as little more than a swimming-pool-filter play. It is that, but it is also much more. I think there is an enormous amount to the story that is not yet fully appreciated.

Beyond providing pumps and filters to pools and spas, they provide a whole host of pumps to municipalities around the globe. And, unlike in the U.S., there are a whole host of places around the globe where people either aren't treating water yet or where they've got old, worn-out infrastructure. And these guys [at Pentair] are in a great position to help with that. They have filtration capabilities that allow them to provide clean water so that you can do it on a big or very small scale.

Think about the fact that when you go to a hotel or resort or a spa, one of the biggest uses and wastes of water is the laundry. They have developed a system they have just started marketing globally that will allow for reuse of that laundry water, for -- among other things -- watering the lawn and plants and trees.

Tell me more about the company.

They've had some management changes in recent years, divested some business, and are now actually running the business better. They will earn a $1.40 or so -- maybe a bit more -- this year, and I think they can begin again to grow close to 20% a year. It's a combination of just expanding their markets and expanding their geographies. They have been a bit more U.S.-centric than they should have been, but are changing that now. The stock is currently at about $30. I think it could be a $40 stock 12 to 18 months out.

Where else have you been putting money?

One of our larger holdings is Alliance Data Systems [ADS]. Most people look at the name -- "Say, that sounds like technology," -- and move on. But when you dig in, it's more interesting.

Despite their name, they are a leading provider of private-label credit cards, particularly to retailers like Williams-Sonoma, Pottery Barn, the Limited, Ann Taylor, Victoria's Secret and others. So some would say it's nothing more than a mere credit-card company, and, if you look at some of their customers, they are not doing very well and the stock can't deserve much more than a [price/earnings multiple] of 10.

If that's all they did, I'd probably agree, and not own the stock. But my view is that they do a whole lot more than just provide credit cards. What they are about is data and the ability to use that data and information to run your business dramatically better. For example, companies not only want to get customers but they want to keep them, and get them to shop more and spend more. Using the data and analytical tools, ADS can work up incentives to greatly boost customer loyalty. They helped Citigroup create their Thank You network, and have recently revealed they are going to be doing some of this on behalf of Visa.

And the stock?

On an earnings-per-share basis, I think that Alliance Data Systems is well on target to earn in excess of $5 a share this year. More importantly, I think they are going to earn probably close to $6.50 in calendar-year 2010. With that in mind, I think this $60 stock could soon easily trade into the 80s.

What else do you have your eye on?

Sometimes, I am attracted by controversy, because controversy can spell opportunity. A case in point is Telvent [TLVT], which attracted me for that reason, even though it's no longer so true; now the story is more about lack of awareness. TLVT is a relatively small company that's based in Madrid, Spain, that went public in 2004 and, until very recently, was majority owned by another Spanish company. What appealed to me initially at the IPO is that they were and are consummate users of technology below the radar.

What exactly does the company do?

One reason they didn't get much attention is that, at first glance, they appear to be in four or five different businesses. But when you look deeper, all those businesses are related to their being a leading provider of real-time corporate operating systems. You may not recognize their name, but we all probably come in contact with them on a regular basis. Until recently, they were relatively Euro-centric but are now doing roughly half their business in the U.S. and expanding globally.

For example, their software is responsible for the movement of over 50% of liquid hydrocarbons [through pipelines] in this country on a daily basis. They are also one of the leading providers of the underlying technology that facilitates toll systems like E-ZPass.

Here is a stock that trades around 30, that I think will boost earnings at over 20% a year. They will earn roughly $2 a share this year, but could deliver, at current exchange rates, over $2.50 in 2010. I reckon the stock is headed up to north of 50.

You have been quite interested in health-care stocks that use technology.

Heath care is a sector of great interest, but less so in terms of services than biotechnology, pharmaceuticals and medical devices. We are living longer, healthier, more active lives, and there's a lot of technology that can go into that -- knee replacements for example.

I had one of those a couple of years ago.

And because you will live longer, you may need a replacement for your replacement in 20 years or so. There is tremendous opportunity here, not specifically in any of the replacement-parts makers but heath generally.

What's your top heath-care pick?

I'm always watching the large-cap pharmaceuticals. But while they make a lot of money, I don't think the growth characteristics are compelling, and I don't think there are cases where innovation is going to be making a meaningful difference. Even if one did come up with something hot to offset drugs going off patent, the companies are all too big for any one new product to have much impact. I am looking at a number of smaller firms. Ones that can grow sustainably, and, most importantly, do it profitably. In the case of biotech, that's mostly an oxymoron. But I have to be able to see a clear path ultimately to profitability. With all this in mind, I like Vertex Pharmaceuticals [VRTX].

What do they do?

Several things, but the focal point is that they now have a product in advanced clinical trials, Telaprevir, which will soon be available to treat hepatitis C, which is a chronic condition that manifests itself in a variety of ways but does so very, very slowly over a period, in many cases, of decades.

If you look at current treatments, their efficacy in many cases is no better than a coin toss. What is very appealing about Telaprevir is that here you have a drug that will offer substantially better critical outcomes, potential cure rates in excess of 75%, in a much shorter treatment period. Further out, Vertex has some very interesting potential to treat cystic fibrosis.

I think Telaprevir is going to be on the market within the next 18 months or so. At that point, there is an opportunity for the company to earn $7 a share, compared with the losses they are reporting now. The stock is trading around 40, but could rise to 60, even 70, within 12 months.

I see you have significant stake in Cree.

This a very interesting company, one that in a way embodies a lot of the things that I am looking for. The reason I got involved with Cree [CREE] a number of years ago is because I got very excited about the prospects of LEDs [light-emitting diodes] in general lighting. But management at the company didn't impress me. Even if you have the best game plan in the world, if you can't execute it, it's not worth a whole lot.

But then there were some executive changes that gave me a lot more confidence in LEDs growing more in the general-lighting field. The point is that LEDs have until recently been going mostly into electronic handsets, and that has become more and more of an unprofitable commodity business. But now other markets are beginning to take off, like autos, commercial store displays and municipal street lighting.

Is all this going to happen quickly enough to boost the stock?

If you look at Cree's stock, I think some are starting to recognize the potential, but nowhere near to the full reality. I'll give you that on a 2010 P/E of close to 40, the stock looks expensive. But since I look for the company to grow earnings at a better than 20% annual rate over the next five years, then I could be right in expecting the stock to jump from about 46 now to well over 60 in 12 months.

You have one more stock you would like to tell us about, I believe.

Yes, though it's one I think will surprise you. Aspen Technology [AZPN].

Ugh! Didn't they get mired in a nice mess?

Oh yes, very much so. This is a sort of Murphy's Law of investments -- just about everything that could go wrong, did go wrong, including management that got caught lying, and with their fingers in the till, and some very late filings of reports to the Securities and Exchange Commission.

But there is a now a totally new management team, and the company remains the No. 1 player when it comes to providing process-control software to the chemical, petroleum and pharmaceutical industries. What appealed to me was that while the company had been driven almost to bankruptcy, when you talked to customers you heard nothing but very good comments about their software and services product.

Aspen's new CEO, Mark Fusco, has done a terrific job of turning the business around -- not only operationally, but in the context of the product and how the product is delivered. And they are continuing to innovate their recovery. So here is a company with a market value of less than $1 billion that has an order backlog of over $1 billion. Looking 24 months out, I see them earning at least $1 a share, possibly much more. The stock should be able to climb from 10 to 15, maybe even 20.

Many thanks, Zack. I appreciate the time. Catch a bass for me, please.