"If we can't understand it, we won't buy it," intoned James H. Gipson in reference to technology stocks.
Perhaps it's a generational thing, because the two other "legendary managers" on a panel at Morningstar Inc.'s recent mutual fund conference -- all of a certain age -- also professed to be shy of Internet stocks in particular.
Mr. Gipson, manager of the more than $800 million Clipper Fund, is a classic large-cap value stock manager. With a concentrated portfolio of only 19 stocks, perhaps an Internet bet seems too risky, although he does take major positions contrary to the market. Mr. Gipson said he is avoiding smaller technology companies because he buys companies at a deep discount to what the market would pay for the firm and "it's hard to say they're excessively priced if they don't have any profits."
Mr. Gipson is president and principal of Pacific Financial Research, Pasadena, Calif.
Mario J. Gabelli, chairman of Gabelli Funds, Rye, N.Y., is a Graham & Dodd disciple. He relies on very deep research and a "lot of kicking the tires" in stock selection. While Mr. Gabelli has been holding cable and media companies for some time, he seems to prefer the Reader's Digest type of company to hotter Internet stocks. Such companies are "way beyond our margin of safety," Mr. Gabelli said, although he added, "most stocks are so far above their safety nets that everything worries us."
David N. Dreman also is avoiding Internet stocks because their pricing is higher than ever before. Mr. Dreman is the manager of the nearly $1.4 billion Kemper-Dreman High Return Equity Fund and the chairman, chief investment officer and founder of Dreman Value Management LLC, Red Bank, N.J.
Mr. Dreman used the example of America Online Inc. to justify his avoidance of Internet stocks. AOL would need 18 billion subscribers, three times the world's population, to justify the stock's price, said Mr. Dreman.
In contrast, a younger Lisa Rapuano, a technology analyst and assistant manager of the Legg Mason Special Fund, has kicked the heck out of the tires at AOL and still likes the stock. She told an audience at a separate session that AOL looks so good because it has no true competitors for its online subscriber network and has the potential to create a global monopoly in the field.