Booyah Breakdown: Tech Stocks

Tear Up the Denim

Now just because you pick a stock from a particular sub-sector doesn't mean you've got yourself covered. For instance, HP has been on a tear while Dell is struggling. So those are two hardware stocks moving in different directions. Chip makers Intel and AMD are moving in different directions, too.

So you really need to dissect each individual stock.

These days, about 40% of the market is made up of tech companies, so if you were following the market, that would mean you should own a similar percentage in your portfolio. But you can't just put 40% of your money in Google and presume you're done.

You have to diversify your tech holdings, and that means you'll need to do some homework.

Pull up your company's financials and look at the balance sheet -- yes, look at it. You want to see lots of cash and very little debt. Then flip to the cash flow statement and make sure it's black -- not red.

Basically you don't want your company to have to pay down debt with its extra cash. If your company has cash on hand, it gives the option to do expand the business and innovate. United Online , which owns NetZero and Juno, has a great balance sheet, which gives it the option to do different things with the business.

The tech industry is so cyclical that a company with a bad balance sheet has very little chance of survival because its all about creating new products for the future.

Now on the income statement, you are clearly looking for positive net income and good profitability margins. But if you don't see them, flip to Management's Discussion and Analysis and see if the company can explain what's going on. Are they investing in R&D? Are there new products in the pipeline?

Then search the Web and read everything you can on the companies in that space. You need to understand the industry in which you're investing.

And note that just because you're investing in tech doesn't mean you can't look for a good dividend. Stocks like Intel, Microsoft, United Online and the Internet media and marketing company Traffix all pay a good dividend, says Mowrey.

So listen to Cramer -- you should get into tech now. But just like you need to try on every pair of jeans in the whole store before you find a pair that makes your butt look like J. Lo's, you need to dissect your tech stocks before you put them in your portfolio.