A window on the future
Nick Calamos of the top-ranked Calamos Growth fund sees big profits to come in e-retail.
By Julie Schlosser

(FORTUNE Magazine) – Nick Calamos never has time to listen to his iPod. But he's still a big fan of Apple Computer's. As the co--chief investment officer of Calamos Investments, a firm founded by his uncle, Calamos, 43, took an interest in the company well before its pocket-sized jukebox got hot. Now Apple is the largest holding in the $14.4 billion Calamos Growth Fund (CVGRX). And the meteoric rise of Apple's stock is just one reason Calamos Growth is the No. 1 fund in its category (multicap growth) over the past ten years, according to Lipper, with an annualized return of 22%. The fund has an eclectic portfolio, of 175 different holdings ranging from Panera Bread to oil producer PetroKazakhstan. But right now Calamos is making his biggest investments in information technology and e-retailing companies. We called to ask him why. -- Julie Schlosser

How do you pick stocks?

Our objective is to clearly be in the best growth companies we can find in America. How do we define that? It might not just be earnings growth. It could be revenue growth that we think is exceptional and will ultimately drive the stock price. Or return on capital that's very high. We analyze a business by figuring the present value of its free cash flow discounted over the life of the company. We throw out GAAP accounting, which is accounting for accountants, not investors. We capitalize R&D, for example. We put operating leases back on the balance sheet, because you clearly can't run your business without them. We account for stock options and any other kind of off-balance-sheet liabilities, like pensions.

You have roughly a third of the fund's money in information-technology stocks right now. Why such a big bet on tech?

We think technology spending growth will continue. It's a necessary part of business these days. There are very strong corporate cash flows. Companies are going to spend that money on making themselves much more productive and competitive in a global market where you have a high capital-for-labor tradeoff. We are trying to compete with a lot of other countries that clearly can produce things a lot cheaper than we can. We think we're in a supply-side-driven model where, in technology, if you produce products people want, you are going to get the demand. Whoever thought they'd need an iPod?

Speaking of Apple, the stock has climbed 343% over the past two years. Can iPod mania keep driving it up from here?

We think there's still upside. It is clearly a much different company than we purchased. We didn't know the iPod was going to be a big success. The stock was very cheap, and the company had quite a bit of cash on its books. All it had to be was a mediocre manufacturing company of commodity products to justify the price when we first bought it. How much would you pay for an investment in a venture capital fund run by Steve Jobs? We priced the cash on Apple's books as if the company were a venture fund and we were getting an option on Jobs' being able to create more opportunity out of that cash. But we're not buying more now. It's pretty fully priced.

I notice that you own most of the major Internet portals and e-tailers.

We are big believers in the Internet media. The business models are great right now. They throw off a tremendous amount of free cash flow. We really like the e-retail concept. We own names like Amazon (AMZN, $35) and Overstock (OSTK, $39). As this next generation moves in, it is much more comfortable using the Internet and purchasing things over the Internet.

How large is the opportunity down the road?

I think right now e-retail represents only 1.8% of all retail sales. And we think that is going way up over the next ten years. We want to be in front of some of the companies that are going to benefit from that, like Amazon or eBay (EBAY, $38). Yahoo (YHOO, $37) has some of that attractiveness. There's a convergence of media going on, and they're in a pretty good position. In the meantime, we try to use comparables. The media companies like ABC, NBC, and CBS generated very high returns on capital between 1950 and 1984. We think that this cycle is going to be a lot shorter than that one, but there is a similar kind of oligopoly situation out there, and the large players are going to benefit from it.