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Laszlo Birinyi of Birinyi Associates, commented in a recent issue of
Barrons, "I can't turn on CNBC without hearing someone singing the
praises of small stocks and warning about overvaluation in the giants".
We are singing the praise of the Giants.

Over the last 2-3 years, the performance of large capitalization
technology companies are out pacing their small cap cousins. We
believe the divergence in performance between small and large
capitalization technology stocks will continue.

Note: Definition
The universe of stocks in which to invest consists of large, medium and
small capitalization companies. Market capitalization is calculated by
multiplying the number of shares outstanding by the stock's current
price. Market capitalization is used as a proxy to place a value on a
company.

Why Look For the Next Microsoft?
We are always amazed to hear investors who are clamoring to discover the
next Microsoft, or next small capitalization stock, in hopes of scoring
big gains, especially when it is actually more fruitful to just own the
real thing. In 1998 alone, Mr. Softee is up 75%, and over the last 10
years the stock's performance is nothing short of amazing, returning
over 50% per year to its faithful. Investors who own Microsoft,
including the many millionaires at its Redmond, Washington headquarters,
experience a doubling of their investment on average every 2 years.

Below is an analysis of specific large capitalization technology
companies we expect to continue to outperform the market and would
purchase on any market pullback. We are separating our comments by
industry segment.

Software Segment:  The growth prospects for the computer software
industry remain strong with the possible exception of the mainframe
market. The evidence supporting the weakness in the mainframe market is
based on Computer Associates' negative forecast for the second half of
1998. We believe this is company specific and therefore remain bullish
on the software industry. Microsoft (MSFT) Did you know Microsoft is
the world's most profitable company, reporting net profit margins of 35%
and gross margins of 91%? The company is in the process of rolling out
the largest software upgrade in its history, including Windows 98, SQL
7.0, Windows NT 5.0, and Office 2000. Mr. Softee is flush with cash
with over $14.0 billion, and reports $2.9 billion in unearned revenue on
its balance sheet. Mr. Softee earned 50 cents a share in its most
recent quarter on a 26% rise in revenues. With little or no price
competition for its products and its rapid ascent into the corporate
computing market with Windows NT, we view Microsoft as a must own
stock.

SAP AG (SAPHY) - Another attractive large capitalization software stock
is SAP AG, a large software company based in Germany. SAP is the
world's 4th largest software company and its' growth rate out paces
Microsoft. SAP provides enterprise software products enabling companies
to better manage operations. SAP AG reported sales increased an
impressive 61% in the first half of 1998, and indicated it is making
significant progress on expanding its infrastructure. These shares
de-bout on the NYSE August 3rd under the ticker symbol SAP. SAP
ADRs(SAPHY), is the top performing stock in our newsletter
(www.usistocks.com), and recently split 4 for 1.

Network Equipment Segment - There are two industry factors benefiting
industry titans Cisco Systems (CSCO) and Lucent Technology (LU) as they
battle for market share in the network equipment market. First,
according to estimates from Dataquest, the market for communications
equipment is estimated to reach $500 billion by the year 2001. Second,
the amount of data expected to travel over voice lines is increasing at
a 200-600% rate, due to the explosive growth of the internet. We look
for both of these stocks to split and out perform the market over the
next year.

PC Segment - According to International Data Corporation, worldwide PC
shipments in the second quarter increased just 7%, however we expect PC
shipments to accelerate in the second half of 1998 driven by new lower
priced processors from Intel, and the busy holiday shopping season.
Longer term we are still in the early stages of the PC boom.

Dell Computer (DELL) - Michael Dell envisions connecting 1 billion PCs
together one day, and only 200-300 million PCs have been sold to date.
We are still in the early innings of what looks like a great ballgame,
especially for a market leader like Dell. Dell Computer is the obvious
pick of the box makers and for good reason. As reported by
International Data Corporation, in the Wall Street Journal, Dell's
revenues increased 70%, over same period year ago levels and the company
is now shipping as many units as market leaders IBM and Compaq. Dell is
number one in server shipments in the United States and number two
worldwide, and is number two in the United States in workstations and
fourth worldwide. These are important markets for Dell as they offset
margin pressure from the low-end PC market (Dell's gross margins
actually increased last quarter). Dell recently announced plans to
enter the lucrative the high-end, data storage market.

Compaq (CPQ) - Compaq is another large cap box maker we find attractive.
Compaq's channel inventory problem is behind them, with dealer inventory
now at 4 weeks of supply, down from 10. Also, Compaq recently revealed
the sub $1,000 PC segment is the company's most profitable PC market.
We believe CPQ will earn $2.00 in 1999 placing a conservative multiple
of 17 on the stock.

Semiconductor Segment - Semiconductor stocks are performing poorly in
1998, and according to Value-Line the group is down 25% year to date.
We are finding value in the semiconductor stocks especially in some of
the large capital issues including Intel (INTC), Micron Technology (MU)
and Analog Devices (ADI).

Intel (INTC) - In the Spring of 1998, both Tom Kurlak of Merrill Lynch,
and Drew Peck of Cowen & Company, the two most influential semiconductor
analysts on Wall Street, turned negative on Intel. At this same time,
during an interview on CNBC Squawk Box we were recommending investors
purchase Intel. Intel stock is trading up 20 plus points since our buy
recommendation for the exact reasons we stated; better than expected
cost of sales performance and an expected up tick in demand for computer
chips in the second half of 1998. We look for Intel shares to continue
to move higher.

Micron Technology (MU)  - More recently, we added Micron Technology to our
buy list, based on a belief of stabilization in the market for DRAM
prices. A number of key players in Asia are either cutting back or
eliminating production including Fujitsu, Hitachi, Toshiba and
Mitsubishi Electric. Also, Microsoft recommends 128MB of memory for
customers running NT 5.0. Micron is the low cost producer in the memory
market, and prices for 16-megabite DRAM, after falling 90% are poised to
stabilize.

Analog Devices (ADI) - Analog Devices, is another large capitalization
semiconductor company well positioned to recover from its oversold
position. The company recently released a new DSP chip and is the
leader in the analog chip market.

Semiconductor Capital Equipment Segment - The worst performing
technology segment, with the possible exception of the drive
manufacturers, is the semiconductor capital equipment stocks.
According to Value-Line the semiconductor capital equipment group is off
35% for the year. However, this is about to change. We expect the
recent downturn for the capital equipment markets to end by year-end and
we look for this group of stocks to make a terrific upside move. Applied
Materials (AMAT) Comments made by CEO James Morgan, of Applied
Materials, at a recent BancAmerica Robertson Stephans Semiconductor
Conference in San Francisco, help reinforce this view. CEO Morgan
commented the growth in the internet, the stabilization of Asia, as well
as the demand for memory and chips by consumers will bring the supply
and demand equation back in balance, thus stimulating demand for capital
equipment. Again we like the large capitalization issues the best
including (above) market leader Applied Materials, Novellus Systems
(NVLS) and Lam Research (LRCX). We also are partial to ASMLF
Lithography (ASMLF), which specializes in wafer stepper machines.

Imagine how comforting it is hearing either on the bus or over lunch
someone taunting the next Microsoft, knowing you already own the real
thing. Another added incentive is to remember that without owning the
large capitalization technology stocks it is difficult for your
portfolio to out perform the market.

Disclaimer: It should not be assumed that recommendations made in this
article will be profitable or will equal past performance. Purchase of
stocks mentioned above is no guarantee of above average performance.
Past performance is no guarantee of future performance. Information
included in this article is prepared from sources deemed correct.
Opinions on stocks are subject to change without notice. Subscribers
are notified by mail, or our web site of changes to recommendations.
USI LLC, its principles or its accounts, may have a position in one or
more of the stocks mentioned above.

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