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A safer seat on this tech rally
Theres a tech rally going on, but the action is focused on lesser-known stocks. Ive learned my lesson on hot tech stocks, though; I buy funds and let the pros pick the stocks.
By Timothy Middleton
Some of technologys most famous names are still in the dumps six years after the Internet bubble burst. But the sector itself is rallying strongly.
As of Feb. 23, the average mutual fund investing in technology stocks had advanced 5.4% this year, more than two percentage points ahead of the broad market. The sectors gain of nearly 20% in the last 12 months is almost double what the market has delivered.
On average, in the tech sector, the small- and mid-cap names we like are growing 30%, says Tara Hedlund, co-manager of Turner New Enterprise (TBTBX). We find the sector to be very attractive.
Growing, but volatile
Last September, with my column "ETF portfolio powers past the market," I boosted my position in the tech-heavy Nasdaq-100 Trust (QQQQ, news, msgs) in my model portfolio of exchange-traded funds.
I am still comfortable with that overweighting, even though the group is volatile and election years often add volatility all their own. These are among the growthiest of growth stocks, and they should do well at least until the next recession rolls in.
| Tech outperforms the market | | 1 month performance | 3 months | Year to date | 1 year | 3 years (annualized) | | Technology sector | 1.8% | 4.9% | 5.4% | 19.8% | 21.3% | | Vanguard 500 Index (VFINX) | 2.7% | 2.9% | 3.8% | 11.1% | 17% |
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Notes: VFINX is a proxy for the S&P 500. Numbers as of 2/22/2006. Source: Morningstar Inc.
Nobody has paid much attention to the tech rally because the sectors best-known brands remain its biggest flops. Since plunging 40% to 70% in the bear market, Microsoft (MSFT, news, msgs) and Cisco Systems (CSCO, news, msgs) have flatlined. Intel (INTC, news, msgs) rallied two years ago, but its still 60% below pre-crash levels. In the last year Dell (DELL, news, msgs) is down more than 25%. (Microsoft is the publisher of MSN Money)
But the sector, led by smaller tech companies, has caught fire. Even after correcting sharply this month, Salesforce.com's (CRM, news, msgs) stock is up 120% over the last year. They are growing their revenue at north of 40%, says Hedlund, whose fund has been buying the medium-capitalization maker of customer-relationship management software in recent weeks.
Related news and commentary on MSN Money
Dave Carlsen, co-manager of Buffalo Science & Technology (BUFTX), says tech-stock valuations have returned to their historical norm of about 35% more than the market average. Were looking for earnings growth (of the sector) this year of about 9%, which is pretty much the normal growth rate, too, he says.
I think the growth expectations and the valuations are normal for technology right now, he adds. Theyre not egregious, but theyre not cheap.
Active tech-fund managers strive to beat this average, of course. Noor Kamruddin, co-manager of Wasatch Global Science & Technology (WAGTX), says, Minimally, a 15% to 20% growth rate is our hurdle.
The industry she sees as likeliest to deliver such growth in coming months is analog semiconductors, which produces such things as power-saving chips for cell phones. The Wasatch fund has a quarter of assets invested in such firms, although Kamruddin declined to say which stocks.
Managers of technology funds are required to invest in the group whether its fortunes are waxing or waning, but Jeff James is not. He manages money for institutions and wealthy individuals for Driehaus Capital Management and currently has about 30% of assets in tech names, by far his largest sector weighting.
Historically we have liked technology, and we like it now more than in the last couple of years, he says.
James is excited about Redback Networks (RBAK, news, msgs), a maker of broadband-networking equipment. They are far ahead of Jupiter and Cisco in delivering cable-quality television to computer screens, he says. The Street thinks theyre going to earn 20 cents (a share) this year and 40 cents next year, and we see (the numbers) low by a factor of 50% to 100%.
A complicated equation
Picking a tech fund is complicated by the fact that many of them, including the Buffalo fund, also invest in medical technologies, which often move in different cycles. Carlsen is part of a team that manages the 55% of fund assets invested in tech. A different group invests the balance in health care.
Numerous other differences also set off individual funds against each other. Some managers follow a momentum-based approach and others are contrarian. Some managers prefer small companies to large, and vice versa. Index funds will appeal to investors who prefer the low expenses of passive management.
A good place to begin is with our Deluxe Screener. To search for top-performing tech funds, click here.
Like plenty of other saps, I bought the hype in the late 1990s and owned several individual tech stocks, including Cisco and Qualcomm (QCOM, news, msgs). When I sold them after suffering enormous losses, I vowed never again. By and large, Ive been faithful to that decision.
(I bought Microsoft some time ago, to capture a huge one-time dividend, but sold it soon afterward.)
The reformed me is sticking with owning tech stocks in the form of mutual funds. I dont know or care which new disk drives or server technologies are good and which are not. Im happy to pay professional managers to worry about that stuff.
At the time of publication Timothy Middleton owned the following securities mentioned in this article: Buffalo Science & Technology.
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