Technology: Love it or leave it.
Technology can never be considered a dead issue, since everyone knows our modern world is constantly evolving with new gadgets and services designed to make work and life more efficient and enjoyable.
Yet because hard-hearted technology jilted scores of investors during their last whirlwind romance, most of these people now want no part of it. It will have to become devastatingly attractive for them to respond to its come-hither look.
In 2002, there have been moments of stock market euphoria over tech's glowing prospects. But these are followed by sell-offs whenever negative-earnings possibilities surface. This group's vulnerability to the business cycle can have chilling consequences.
The bankruptcy of former telecommunications favorite Global Crossing Ltd. and government inquiries into its accounting practices casts a long shadow over all technology. Tech numbers have often been controversial.
Investors who decide to sign on to tech's dance card should do so with caution and only for a dedicated portion of their portfolios. They must have realistic expectations, understand what a given company actually does and consider earnings prospects along with the usual pie-in-the-sky hype.
Technology stocks as a group are trading at around 50 times this year's expected earnings, rather pricey in light of the unsure near term.
"Since information technology spending tends to lag in a recovery, we're looking at late this year or early next year before things really improve materially," predicted Art Russell, senior technology analyst with Edward Jones in St. Louis. "The first to see a pick-up in demand would be the semiconductor companies and component vendors."
Lagging behind will be companies making the expensive enterprise software used by large corporations, he believes. The last segment to improve will be communications equipment companies such as Cisco Systems, Lucent Technologies and Nortel Networks.
Russell considers the best bargains for investors to be the well-known stocks of software maker Oracle Corp. (ORCL) and computer-networking firm Sun Microsystems Inc. (SUN). They'll fare well in an economic revival.
"The funny thing is, even though the Nasdaq is down 60 percent over the past two years and 14 of the 20 worst industries were tech industries, prices of these companies in relation to their earnings are still very high," observed Sam Stovall, senior investment strategist with Standard & Poor's in New York. "Investors are factoring in a nice economic turnaround, but it has to be right on target for these high valuations to be justified."
Though technology remains "under water" for the last 12-month period, Stovall notes it has been trending higher in 2002.
Stovall likes the stock of the virus protection and security firm Symantec (SYMC) and the e-business software maker Siebel Systems Inc. (SEBL). Once again, these are established firms.
Top-performing technology funds over the past 12 months were mostly newer, smaller funds, according to Morningstar Inc.:
Wasatch Global Science & Technology (WAGTX), Salt Lake City; $27 million in assets; "no load" (no sales charge); $2,000 minimum; 1-800-551-1700; up 32.97 percent.
Fidelity Select Software & Computer Services (FSCSX), Boston; $940 million; 3 percent load; $2,500 minimum; 1-800-544-8888; up 17.70 percent.
Marketocracy Technology Plus (TPFQX), Los Altos, Calif.; $870,000; no load; $10,000 minimum; 1-888-884-8482; up 14.56 percent.
Kinetics Internet Emerging Growth (WWWEX), White Plains, N.Y.; $4.56 million; no load; $1,000 minimum; 1-800-930-3828; up 11.42 percent.
RS Internet Age (RIAFX), San Francisco; $71 million; no load; $5,000 minimum; 1-800-766-3863; up 8.44 percent.
Only Fidelity Select Software & Computer Services has been around long enough to produce a three-year record, turning in an 8.82 percent three-year annualized return.
"We're defensively positioned in technology, owning stocks of services companies that do anything from outsourcing to payment processing," explained Christian Zann, portfolio manager of that fund. "Information technology spending usually grows at about two times the rate of the Gross Domestic Product growth, so if we assume the economy is recovering, tech should recover with it."
Some of Zann's top portfolio holdings are industry leaders Microsoft (MSFT), software company BEA Systems (BEAS), Veritas Software (VRTS), Adobe Systems (ADBE) and IBM (IBM).
Indicative of the technology's risks, one of the best fund performers prospered not only by choosing likely winners, but betting heavily on potential losers as well.
"We buy a portfolio of what we hope will be excellent-performing technology companies, but we're also allowed to do some hedging with short positions designed to reduce volatility," said Paul McEntire, portfolio manager of Marketocracy Technology Plus.
McEntire successfully shorted Exodus Communications, which subsequently filed for Chapter 11 bankruptcy protection.
Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," P.M.B. 184, 369-B Third St., San Rafael, CA 94901-3581, or by e-mail at andrewinv@aol.com.