Note to the true believers: You're right, dot-coms aren't dead. Believers see the articles of faith everywhere: Web addresses on every TV commercial, Internet recruiters at every call, Sprint (FON) and GTE (GTE) giving away Net-enabled cell phones. As I write this, I hear the steely shrill of a concrete buzz saw opening up a trench to lay fiber-optic cables that will carry broadband Internet traffic.
Some money managers see opportunity at a more fundamental level - in the buildout. And stockholders in the electronic-manufacturing services industry have been the beneficiaries: Flextronics, Jabil Circuit (JBL), Sanmina (SANM), SCI Systems (SCI) and Solectron (SLR) create many of the products sold by companies like Cisco Systems (CSCO), Ericsson, Lucent Technologies (LU), Nortel Networks (NT) and Qualcomm - the guys building the Internet.
"These guys continue to blow away the numbers," says San Francisco-based hedge fund manager Jerry Apodaca of the Apodaca Investment Group. "Right now, the Street could care less. Good news doesn't matter anymore, but it should."
Jim Savage, an analyst at Thomas Weisel Partners, has been banging the table for the sector. "There has been an indiscriminate sell-off in these stocks," says Savage. "And yet the results from the entire sector have been quite strong. This has happened three or four times in the last five years and every time has represented a classic buying opportunity."
These top five electronic manufacturing companies have seen annual revenues grow better than 30 percent over the last four years - and net income, in aggregate, grow 47 percent a year. This surge is coming from the new infrastructure and an increase in outsourcing by original equipment manufacturers like Cisco.
This outsourcing has been misunderstood by investors, who believe these companies outsource only during boom times. "For several years, I've been fighting against a lot of disbelief," says Savage. "They think that EMS business is transient; that they only have work when there is not enough capacity at the OEMs. And they think the OEMs want to manufacture themselves."
But in reality, manufacturing can be a nightmare for these original equipment manufacturers, and they're often glad to rid themselves of it. They don't want the problems that come with managing supply chains.
Nortel recently announced it would sell a pile of its global manufacturing capacity to Solectron. Last month Lucent said that it would outsource from 20 percent to 60 percent of work in the next two years. Alcatel (ALA), Cabletron, Ericsson, IBM, Nokia (NOK) and Siemens (SI) have announced more than $6 billion in outsourcing divestitures this year alone, according to Savage.
Meanwhile, some investors are starting to dismiss recent concerns about component shortages. On April 28, Solectron warned that shortages in some components would cause sales to be $3.4 billion in the quarter ended May 31, $200 million less than expected. The news crushed Solectron's stock, down more than 30 percent since the announcement, and led to concerns that this was only the tip of the iceberg. "If Solectron has shortages," says one anonymous money manger, "do you really think they're alone?"
But Savage and others maintain that Solectron's shortages aren't significant. Managing component shortages is exactly what these companies are there for. "Hey look, there have been component shortages for six months, maybe more," says Apodaca. "When it was a bull market no one cared. Now that the market is down, everyone's suddenly worried about components. But from what I can see, demand is still good."
Cory Johnson is an editor at large for TheStreet.com (TSCM).
