The Year 2000 caper: Finding riches in glitches But unwary investors risk getting singed chasing fix-it stocks

The millennium

April 19, 1998|By William Patalon III | William Patalon III,SUN STAFF

It's called the "Year 2000 problem," an invisible, creeping terror, a potential digital shipwreck that will cost companies and governments hundreds of billions to dodge. That problem could mean millions or even billions coming into the coffers of tiny start-ups or existing firms that, until now, haven't exactly been household names to many investors. And that windfall business, in turn, could mean a huge payoff for investors who buy stock in the right companies.

But there's a catch: While companies want to avoid getting stung by the Year 2000 bug, investors want to dodge the so-called "Year 2001 problem," which could render their shares worthless.

For businesses and government agencies, the Year 2000 problem, also known as the "Y2K problem," is a software glitch that theoretically could cause global chaos at 12: 01 a.m., Jan. 1, 2000. For investors, the Year 2001 problem is when those companies set up to solve the Y2K problem succeed at their task -- and suddenly find themselves bereft of new business.

Kevin Landis, portfolio manager of the San Jose, Calif.-based Technology Leaders Fund, avoids Year 2000 stocks like a vampire avoids sunshine.

"We don't own any Y2K stocks," said Landis. "We've done just fine without them. Stocks trade on a model based on a stream of future earnings. Year 2000 stocks have a 'Year 2001' problem [when their business may well be done]. They're priced for a one-time windfall and that's not the same as pricing them for" a business that will continue for years.

But Joseph Besecker, president of Lancaster, Pa.-based Emerald Asset Management, thinks investors who avoid Y2K stocks will be avoiding profits as well. In fact, Emerald's HomeState subsidiary started a mutual fund in October that invests solely in Year 2000 stocks.

"I think there's a lot of misunderstanding," Besecker said. "People think the work will all come to an end with the year 2000. In some ways, it will just be beginning. They're missing the truth: There will be plenty of work to do post-Year 2000."

Y2K stocks have been hot for several years -- and many appear to be considerably overvalued. The Bloomberg Year 2000 Index -- a collection of 37 Year 2000 companies -- is up about 11 percent so far this year and 70 percent in the past 12 months. The Dow Jones industrial average, by comparison, is up 38 percent over the 12-month period.

Year 2000 stocks can pose huge risk of losses and should be relegated only to the riskiest part of any investor's portfolio. The least risky stocks are the firms that devote only a small portion of their business to Y2K work. Other firms get most of their revenue from the Year 2000 arena. Then there's the HomeState Y2K fund, essentially a high-octane sector fund.

When it comes to the companies themselves, essentially two types exist:

The firms that make and supply the software "tools" to fix the Y2K problem, but leave the actual work to vendors or customers;

The soup-to-nuts suppliers, who sell the tools and actually help the customer fix the software problem.

In the California Gold Rush days, historians say, those who got rich were not the prospectors, but the merchants who sold them the tools -- the pick-axes, shovels, pots and pans. Today, however, the digital tool companies haven't fared so well -- indeed, many have seen their stock prices plunge as customers have shown their preference for suppliers that can provide the software and do the work, too.

Take Intersolv Inc., the Rockville-based provider of software and services -- including Year 2000 fixes -- to customers worldwide.

"There are multiple types of companies," said President and Chief Executive Officer Gary G. Greenfield. "The tool suppliers might sell the saws and the hammers, but they don't build the house for you. The tools are nice, but Intersolv takes end-to-end responsibility. If you take the tools, the next level is the carpenter, and then there's the general contractor. That's where we see ourselves."

That strategy is one reason eight analysts rate Intersolv shares as a "buy" -- with no holds and no sells, according to Bloomberg News.

Intersolv is also diversified: It's even getting business from Europe's transition to a single currency, the so-called "euro."

The Year 2000 problem is simple to understand, hard to fix and presents what most industry analysts believe is an immense business opportunity for companies who can solve it.

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