Google, Apple Won't Let Us Down, Says Fund Manager

Talk about a New Year's hangover.

The (BIOPX Quote)Baron iOpportunity fund finished 2007 on a high note, up 21% for the year or more than double the Nasdaq's return. Riding the lengthy coattails of tech superstars Apple(AAPL Quote), Google(GOOG Quote) and Research In Motion(RIMM Quote), the four-star-rated technology fund had momentum to spare.

Then the ball above Times Square dropped to ring in 2008. It seems to have landed, unfortunately, right on some of the fund's biggest winners. The iOpportunity fund, which has returned an average of 23% annually over the past five years, is down 15.5% year-to-date, but fund manager Michael Lippert is confident that the turn is at hand.

"Many of our big-cap tech stocks were up 100% or more last year," says Lippert. "One can only expect the market would take some back. And high-multiple stocks are being hit the hardest as concerns about the economy snowball."

Apple, for example, is down 38% year-to-date, after rising 133% in 2007. The shares, which started the year close to the $200 mark, now trade around $125. Not even January's impressive first-quarter earnings report could stem the slide, as analysts fretted over iPod sales and the company's second quarter guidance.

Lippert, however, has few qualms with the company's results calling it Apple's "best holiday quarter ever." He cites a 44% rise in Mac sales and iPod revenues increasing 17%, despite unit growth of only 5%.

"It does not matter if the iPhone is cannibalizing iPods if they are getting a higher price for it," says Lippert, who believes the stock has bottomed. "It's all part of their product line."

Lippert also says Apple bears neglect the fact that the company is deferring revenue on the iPhone over a two-year period, yet is still booking costs upfront. "That depresses near term earnings, so unlike most of their competitors, investors need to concentrate on their free cash flow."

If economic concerns are unnerving Apple shareholders, they are absolutely frightening RIMM investors. Lippert, however, remains cool to the recession mob mentality.

"People assume that if the investment banks start laying people off then it will hurt Blackberry sales," says Lippert. "The same logic applies on the consumer side. But the company is taking market share from Motorola(MOT Quote) and Nokia(NOK Quote), and on an earnings basis this is not an expensive stock for a company that doubled its earnings last year."

As for Google, another top-five holding at 4% of the fund's assets, Lippert says they are being punished for slower query growth at the end of 2007, as well as for missing Wall Street's earnings estimates in the fourth quarter. Wall Street had grown accustomed to Google blowing away their numbers, so Google's slight miss became another reason for traders to sell the search giant.

Now around $510 a share, down from almost $700, Google shares are cheap at just 20 times forward earnings, says Lippert. And as for the potentially powerful competitor in a combined Microsoft(MSFT Quote)/Yahoo!(YHOO Quote)? It's way too early to even think about that, says Lippert.

"It will probably take a year to get regulatory approval once Yahoo! agrees to it, and then they will have huge integration challenges for at least a year as they try to mix platforms," says Lippert. "Meanwhile, Google will be focused on growing profits. This deal is a huge positive for them."