2HRS2GO: Rambling with Robby Stephens research

SAN FRANCISCO -- The latest Robertson Stephens investment conference ends today, but I'm not there.

Don't take that the wrong way. It's a useful event for financial journalists, which is why I spent a good chunk of this week at the hotel hosting the Robby Stephens show. These conferences offer good oppportunities to get some color on Wall Street's mindset at the moment, and some insight into the technology investment areas targeted by funds and portfolio managers.

But a person can only gather so much in the way of impressions, can only pump so many hands and exchange so many phone numbers before everything descends into a haze of PowerPoint slides and flat-voiced CFOs saying nothing that hasn't already been revealed in regulatory filings, press releases or conference calls with analysts.

So after two days of presentation-after-presentation-after-presentation, it seemed like a good time to find someone who could provide a broader look at technology stocks and analysts. And it doesn't get much broader than John Rohal, director of research for Robertson Stephens.

Talking to Rohal provided a relaxing change of pace. Excerpts from our short conversation follow.

Rohal on the large number of private companies at the conference:

"The whole idea of this conference is to help people understand what's going on in technology, in the Internet, particularly looking at how trends in various sectors of technology are affecting the Internet, how the Internet is developing. And to really do the best job of bringing out those new trends and new investment themes, you really have to understand the private companies, perhaps even moreso than the public companies.

"So you want to have a good group of public companies, because it's always a good platform of understanding. But at the same point in time, you want people to see what's sort of emerging in terms of either new technologies, (or) emerging market sectors."

On the most promising of those new technologies:

"Well, wireless applications, obviously, are very exciting to people, and there's a lot of investment being done relative to how wireless data is going to affect a lot of different Internet sectors.

"So whether you're talking about business transactions, or consumer transactions, or just service related companies, there's just a lot going in wireless, so I would say that's going to be a very important issue relative to the Internet."

On companies that stand out:

"If you're looking at public companies, Phone.com (Nasdaq: PHCM) is obviously one of the leaders in that respect, and has a lot of relationships. BlueKite.com is a good example of an emerging (private) company that's talking about how to optimize performance on a wireless network for people.

"But those are just two examples. There are a lot of them."

On how the stock market has affected the job of an equity analyst:

"The way we approach equity research is from a fundamentals perspective, meaning we're looking at what is going on in the industry.

"As an analyst, that job of understanding the fundamentals and putting them into the perspective of an industry or industry thesis is really unchanged whether the market is up or down.

"Now the other part of a job of a research analyst is to help people understand what they ought to be doing with a stock. Should you be buying or selling? Determining value becomes extremely difficult when you get into highly volatile markets, because you start to question the basis upon which the stocks are valued.

"And that's particularly difficult when you're in a period like we're in right now, where values are outside of any normal band of valuations. So these are the highest kind of values we've ever seen for stocks of any type at any time.

"The fact that the market is down somewhat from where it was in March makes no difference; we're still at the highest levels of values that we've ever seen at any time. So if you try to focus too much on valuation metrics alone, it's going to be very difficult for you, because there's not good bases for judging value at these kinds of levels.

"And so what people try to do is, they're attempting to do what is relative. In other words, let's look at how other stocks of this nature are being valued, let's look at other industry sectors that may be comparable, and let's try to understand the dynamics of growth."

But peer-to-peer comparisons only go so far:

"It's only as relative as the overall market, right? Because if the overall market comes down -- what was clearly shown, when the Nasdaq dropped from the 5000s to the low 3000s, every stock came down. And so does it do me any good as an investor if the relative merits still look good for a company, but the stock is down 30 or 40 percent? Doesn't help that much.

"On the other hand, you could've argued for the past three years that the market was way outside of the bands of valuation. Would you have liked to have missed ྜྷ, ྞ, ྟ? No. If you were an investor in the Nasdaq, you were a very happy camper through March."

Ultimately, you have to make your own market call:

"You try to do the best you can looking at relative value. You try to do the best you can in terms of discounting the future. You try to understand what's happening with return on invested capital."

"But when the day is done, you have to tell investors, 'Look, this is an extreme valuation period we're in. If you believe that is going to continue, here are the best companies, here are the ones that are benefiting the most from the fundamentals, here are the ones that have the best investment thesis.'

"But you have to make sure that you're comfortable that the valuations are going to be continued."

On drawing lines of analyst coverage:

"Probably the most difficult job around the Street today is trying to define market sectors for coverage by analysts. I think everybody is trying to grapple with the difficulty of market definition and coverage definition for analysts, and there is no simple answer to it.

"What we try to do, again, because we are very thematic, we try to create themes for our industry sectors, have an understanding of why investments are going to work well, and we try to get in early.

"We constantly evaluate to see where companies fall and where markets fall. The markets are definitely evolving at their edges, and in some cases, big parts of them are in flux, and so you have to continually be evaluating coverage and how you're going to provide the greatest insights. If you're going to add value from a research perspective, it's because you perceive these changes, hopefully early, and you realign your coverage to allow analysts to really help investors understand the change."

Examples:

"We were one of the first people on the Street to create the Communications (Integrated Circuits) concept, the concept that semiconductor companies were going to become focused on driving communications functionality down to ICs. And so we segmented that coverage.

"We're actually moving Oracle (Nasdaq: ORCL). We traditionally covered Oracle as a software company, a traditional software company. We're actually moving it into the B2B space, and we're going to be following it as more of a business-to-business software company. The idea there being that we think at the margin, Oracle is going to be incrementally highly valued as an investment if they are succcessful at becoming more important in selling people B2B software, as opposed to databases."

On the number of analysts on Wall Street these days as investment banks consolidate:

"The reality is, for the large successful companies, there is sufficient coverage and there's probably too much coverage. One could argue there's too many analysts on some of those companies, given the fact that (you can ask), how much does the 31st analyst add on Cisco Systems (Nasdaq: CSCO)? Do they really bring value to the game? As opposed to the top 10 or 15? Wouldn't 10 or 15 analysts create an efficient market for Cisco? Yeah, probably, especially if it was the top 10 or 15.

"Alright, so one could argue that for the biggest and fastest-growing and largest market cap companies, there are, at the margin, probably too many analysts. On the other hand, for the smaller companies, that ones that are in either less attractive niches, or where the growth has slowed, or where they've been orphaned because they've had a hiccup in their growth rate, they're probably undercovered. They are literally hundreds of companies that have too little coverage.

"I don't want to get into naming (company) names, but this has been written about a fair amount, that there's just a lot of orphaned companies. And so for them, there is too little research coverage. And so it's the dichotomy of the largest caps versus the smallest caps, and how you rationalize that.

"If you could balance it, I'd say, probably there's room for more coverage. On the other hand, it isn't balanced, and therefore, on the biggest companies, there's too many of them. So more consolidation is going to happen."

And it won't stop soon:

"I think that our business is one of the really exciting businesses, because it's a business of information and value-added. And therefore, I would argue that it's never going to cease, because what'll happen is, we'll go through a wave of consolidation, you'll see more of this occur.

"You've seen the press, 'Name the Next Three Candidates to Be Consolidated,' everybody's got their scorecards ready, and they're handicapping to see who's going to be the first of those. So I think the consolidation wave is going to go on for awhile.

"But what will happen out of that is, it will get to a position where there's a market crease that will attract some of those people who either lost their jobs in the consolidations, or get tired of working for a really big organization, that will want to strike out on their own. And the entrepreneurial spirit will cause a new wave of innovation and business formation.

"It's the cycles that occur all the time in businesses that are high value-added, service intensive and highly energetic, talent driven." 22GO>