Paradigm shifts bring unique investment opportunities

Identification of the companies pioneering these shifts is key.

We have pounded the table in our monthly column, at investor conferences and to anyone willing to listen. Our message: this phenomenal bull market expansion is only in the second or third inning of a nine-inning, action-packed ball game. The foundation for our enthusiasm is not based on some obscure macroeconomic theory, or on a batch of charts that resemble a convoluted New York City highway map. Instead, we have followed advances in technology and the incredible productivity gains that technology and innovation have enabled. As technology becomes more and more sophisticated, the consumer demands that interaction with the technology becomes simpler and more elegant. On the horizon, we see several emerging paradigms that will rock the incumbent status of many dominant companies, while adding simplicity and productivity to our lives. These fundamental paradigm shifts will present unique opportunities for investors who can identify the companies who are pioneering the seismic shifts.

Voice recognition software

In the past 6 months, Belgian-based Lernout & Hauspie (NASDAQ: LHSP) has announced a series of fascinating breakthroughs in the area of voice recognition software. Using complex algorithms that can identify individual properties in a user’s voice while recognizing the context in which the words could be applied, Lernout’s software has emerged as the brains powering numerous appliances. As the scope and complexity of technology ascends a hockey stick curve, speech recognition software actually enables more and more people to become “technology literate.” Microsoft, through its Windows operating system, has enabled many of us to capitalize on the power of computers by creating a “user-friendly” interface. However, the majority of our population is still intimidated by the keyboard, and the countless buttons, switches and knobs that serve as the interface between the computer and ourselves. In several years, speech recognition software will force us to take a trip to the local pawnshop if we want to find a keyboard. However, the computer is only the beginning of the potential targets for companies like Dragon, IBM and Lernout.

Language barriers have hindered businesses, education, politics and virtually every other aspect of interaction between regions with different linguistics for all of recorded history. New translation software enables the translation of speech in one language to both the verbal and written equivalent of another language. Personal appliances, roughly the size of a Dictaphone, will enable individuals who speak different languages to communicate effectively. Further, computers require the user to be literate. A computer that operated on natural language voice instructions would eliminate these inherent literacy requirements, allowing any individual who could speak, regardless of the language, to exploit the wonders of the digital realm.

Retinal scanning displays

The thought of miniature displays that use micro-miniature light emitting diode (LED) lamps to create a full-color high-resolution video image that is projected directly onto a user’s retina may seem too futuristic for most of us. However, Microvision (NASDAQ: MVIS) is already demonstrating these devices as a result of Cree Inc.’s (NASDAQ: CREE) breakthroughs in LED technology. Microvision is currently working on developing wireless devices that project real-time streaming images directly onto the user’s retina, giving the impression of seeing a full-size computer or television at arm’s length.

The potential new products for such remarkable innovations are wearable computers, wearable displays for computer games and ultimately a converged cell phone/Palm Pilot/computer/television devoid of monitors and displays. The images have achieved a level of brightness and clarity superior to a standard television based on cathode ray tubes. As consumers migrate from personal computers to hand-held devices, a lingering concern has been the miniscule size of the displays. Devices that could project the content directly onto the user’s retina would accelerate the adoption of these devices and provide the enabling companies with vast markets. It is unclear if Microvision will conquer the consumer markets with the same success that they have had in penetrating military markets, so we would focus on the true enabler, Cree. The Durham, N.C., company has parlayed its expertise with silicon carbide into a dominant role in the production of LEDs found in watches, vehicle dashboards and billboards. Retinal scanning displays would present Cree with new opportunities to extend its current dominance in the LED market.

Converged electronic appliances

The retinal scanning displays discussed above may represent the pinnacle of the current movement toward multi-purpose hand-held devices. The thought of owning and having to keep track of a cell phone, a pager, a Palm Pilot, a camera and a portable fax machine is a potentially expensive nightmare for most of us. Several companies are designing appliances that will integrate all of these functions into a single hand-held device. These “thin clients” as they are often called will allow us to own one device that will be capable of cellular telephoning, e-mail, Web surfing, receiving and sending faxes, taking digital photographs and duplicating all other Palm functions. All of these applications will operate from a wireless platform.

National Semiconductor (NYSE: NSM) is spearheading the movement toward these devices by making chips that have embedded systems. Put simply, these chips possess a plethora of functions on them, allowing devices to become significantly smaller, while consuming far less power. These “systems-on-a-chip” condense the motherboard of a computer and all of its components onto a chip the size of a quarter. Adding additional credence to this shift, Nokia’s (NYSE: NOK) management has estimates that by 2003, there will be more hand-held devices connected to the Internet than there will be personal computers. This seismic shift in consumer demand will create burgeoning markets for those companies that provide the devices as well as the embedded components.

Fiber optics

As I have stressed in my previous articles, bandwidth, or the amount of data that can be transmitted in a fixed amount of time, will be the crucial bottleneck for the success of a global Internet. Currently, the old copper networks represent a disturbing choke point on the flow of data, video and telephony, as they were built to simply carry phone calls. These networks are being replaced rapidly by fiber networks, where the traffic zips across the glass in the form of photons, or light. This build-out will result in terrestrial and sub-sea fiber and the associated components to become as ubiquitous as the power poles that cater to all of our electricity needs. This build-out has already begun, and over the next 5 years, the addressable market will be north of $100 billion. Companies such as JDS Uniphase (NASDAQ: JDSU), Corning (NYSE: GLW), Nortel Networks (NYSE: NT) and Sonus Networks (NASDAQ: SONS) have positioned themselves in the sweet spot of this market.

One company that is attempting to disrupt the darlings of optics is Avanex (NASDAQ: AVNX), whose PowerMux is a component that can create dedicated circuits on wings of light. In every sheath of fiber, there are hundreds of individual strands of glass. Avanex can multiply the amount of data being sent down each of these strands 800 fold, which would quench the global appetite for bandwidth. Their miraculous feat is accomplished by dividing each strand into channels, or wavelengths. Each wavelength operates as its own unique color in the spectrum, having an associated unique frequency. PowerMux has the ability to recreate the dedicated circuits without the bandwidth constraints experienced by the traditional circuit-switched Telco operators today.

PowerMux would make streaming video a reality, paving the way for applications that seem like they belong on the Science Fiction channel. Avid sports fans will have the choice of camera angles to watch a baseball game. Physicians will have the opportunity to help their peers during difficult operations, by watching the surgery from the microscope as if they were there. The country’s best professors will give lectures to academic classes nationwide, giving all students access to the finest educators. Avanex’s PowerMux has the potential to enable countless applications that we cannot fathom today because bandwidth has always been at a premium, which has hindered aggressive innovations and the search for the “killer” application.

For Your Information:

Fred L. Dowd is a registered investment adviser and portfolio strategist with physician clients throughout the United States with offices at 104 S. Wolcott St., Ste. 740, Casper, WY 82601. He can be reached at (800) 252-3693; fax: (307) 234-3557; email: fldowd@trib.com; web site: www.fldowd.com.

Guest contributor Jeffrey B. Osher is a registered representative and portfolio strategist for the Fred L. Dowd Company.