Tech's nuclear winter probably isn't over.

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Sector fund mangers tend to be permabulls, but Paul Meeks isn't cheerleading and that's understandable. His

(MAGTX)

Merrill Lynch Global Technology fund is down some 70% over the past 12 months, roughly equaling his average peer's tumble. His

(MANTX)

Merrill Lynch Internet Strategies fund, which was launched with much fanfare 12 days after the

Nasdaq's

peak in March 2000, is slated to merge into the battered Global Tech fund after falling 76% over 12 months.

In the wake of these losses and the terrorist attacks on Sept. 11, Meeks has sought shelter in cash, in addition to defense-contractor and pharmaceutical stocks. Demand for tech products should rebound with the economy next year, he says. And while he sees values on his radar screen, he sees big risks, too.

What's the case for investing in tech now and what does he own? Read on.

Talking With: Paul Meeks

Fund: Merrill Lynch Global Technology

Managed Since: June 29, 1998 (inception)

1-Year Return: -70.8%/ Trails 60% of Peers

3-Year Return: -4.7%/Trails 74% of Peers

Maximum Load/Sales Charge: 5.25%*

Expense Ratio: 1.17%

Top-Three Holdings: Altera ,
Taiwan Semiconductor ,
Dell

*Sales charge on Class A shares. Sources: Morningstar and ml.com. Returns through Oct. 3.

1. Investors knew tech funds were risky but probably never thought losses would be this bad. What do you say to these folks now?

I was kind of surprised with the declines actually, since it's been straight down since March 2000. Prior to the World Trade Center disaster on Sept. 11, you started to see some subtle signs of stabilization. At that point, I think you could have made a decent case for a tech rebound.

Unfortunately, the terrorist attacks have put the economic recovery six months or so further out. It's a good idea to avoid overweighting tech stocks until all these companies announce their September results because we know the news is going to be a lot worse than expected, particularly in the software space. We're predicting that absolutely no business got done for some software vendors since Sept. 11.

On the bright side, hopefully, these companies will see that they have a free pass with the World Trade Center disaster to lower guidance as far as they can so they have a low hurdle to step over down the road.

2. Given these eye-popping losses, what's the case for investing in tech today?

Tech companies are highly cyclical, so their stocks should rise with any rebound in the economy -- you and I both know that that's got to happen sooner or later. Is it the second quarter of 2002? That seems to be the consensus. Stocks typically reflect that three to five months in advance, so we're getting to very late this year or very early next year for tech stocks' rebound.

Hideously high valuations have come in. There are still some industries in the tech sector and some stocks in particular that are still not down to trough valuations, but every day you wait you're getting closer.

3. What are you doing differently today as opposed to what you were doing in the first quarter of 2000?

Today, we have a pretty high cash position, at about 14%. So we've got some dry powder, but I'd like to halve that by the end of the month -- according to Lipper statistics, my typical competitor has about 7% cash. I can't really say that we advocate pure value investing in tech because then you get into a lot of bankruptcy situations and we don't want to be there, but we're advocating a

growth-at-a-reasonable-price approach. We're now stricter about looking at valuations. We've always done that, but we're really acutely sensitive now.

4. What are you confident owning or buying now?

Well, we have the big cash position, and I think that's a meaningful defensive bet. We also own some defense contractors, and these have done relatively well for us because we owned some before the Sept. 11

attacks. In defense, we have

L-3 Communications

(LLL) - Get L3 Technologies Inc Report

,

Lockheed Martin

(LMT) - Get Lockheed Martin Corporation (LMT) Report

,

Northrop Grumman

(NOC) - Get Northrop Grumman Corporation Report

and

Raytheon

(RTN) - Get Raytheon Company Report

. We have about 3% of the portfolio in those stocks, with the biggest positions in L-3 and Northrop.

We also have built some exposure in health care, with stocks like

Johnson & Johnson

(JNJ) - Get Johnson & Johnson (JNJ) Report

,

Merck

(MRK) - Get Merck & Co., Inc. (MRK) Report

,

Pfizer

(PFE) - Get Pfizer Inc. Report

and

Tenet Healthcare

(THC) - Get Tenet Healthcare Corporation Report

. Out of the four of those, Tenet and Johnson & Johnson are the biggest holdings. Those four stocks make up about 4% of the portfolio.

As a pure tech investor, I can have some flexibility on the fringes, but I cannot have an all-defense-contractor portfolio or a health care portfolio because people invest in technology funds because they want to invest in technology stocks. We're just trying to dampen the risk somewhat with these picks.

We still have a finger in most technology sectors, but we've lessened our exposure in the cyclical areas like semiconductor and semiconductor capital equipment because we think the economic rebound that was supposed to lift them will be delayed. Probably our biggest underweight in the portfolio is PC stocks. That had become a bad business even before recent events.

To play some defense, we've beefed up exposure somewhat in IT services because we like their steadiness. There we own companies like

Affiliated Computer

(ACS)

,

ADP

(ADP) - Get Automatic Data Processing, Inc. Report

,

Concord EFS

(CEFT)

,

First Data

(FDC) - Get First Data Corporation Class A Report

and

Paychex

(PAYX) - Get Paychex, Inc. Report

.

10 Questions Archive

10 Questions with Dividend Disciple John Snyder

Fidelity Expert Jim Lowell

Janus Growth & Income's David Corkins

White Oak Growth Stock's Jim Oelschlager

Firsthand Funds' Kevin Landis

Oakmark's Bill Nygren and Transamerica's Jeff Van Harte

John Hancock Financial Industries' Jim Schmidt

5. Do you see value in tech?

I think there are some interesting values. There are a few companies we own that are particularly undervalued: contract manufacturers like

Celestica

TheStreet Recommends

(CLS) - Get Celestica Inc. Report

,

Flextronics

(FLEX) - Get Flex Ltd. Report

and

Sanmina

(SANM) - Get Sanmina-SCI Corporation Report

. I'm not going to add any defense and health care positions because at that point I want to be moving out of those names.

Electronic design automation software companies like

Cadence

(CDN)

and

Synopsis

(SNPS) - Get Synopsys, Inc. Report

look very cheap, too. Believe it or not, some of the survivor Internet companies look very cheap right now, like

AOL Time Warner

(AOL)

and

Homestore.com

(HOMS)

. Unless you think the real estate business is permanently going away, I think Homestore.com is probably the most compelling of all the Internet buys today. I'd rate AOL as a No. 2 if it breaks into the 20s from the low 30s.

Some of the semiconductor companies are coming in, and when we do go back there, they will play an economic-rebound bet: the guys in the programmable logic space like

Altera

(ALTR) - Get Altair Engineering Inc. Class A Report

and

Xilinx

(XLNX) - Get Xilinx, Inc. (XLNX) Report

, the analog companies like

Maxim Integrated Products

(MXIM) - Get Maxim Integrated Products, Inc. (MXIM) Report

and

Linear Technology

(LLTC)

.

Texas Instruments

(TXN) - Get Texas Instruments Incorporated Report

and

Intel

(INTC) - Get Intel Corporation (INTC) Report

will have nice moves, even

Taiwan Semiconductor

(but we own the local Taiwanese shares, not the ADR).

Software's been hammered, as you know, and

Amdocs

(DOX) - Get Amdocs Limited Report

is a stock that we are increasingly getting interested in. We own it, and it's a leadership company we'd like to buy for the long term.

6. Tech companies' earnings and stock prices are basically driven by corporate tech spending, which has cratered. When do you see it coming back?

My guess is that it's 80% of tech companies' earnings

that are driven by corporations' spending and 20% driven by you and me buying a

Dell

PC for our home. I think you probably will not have a significant increase in corporate technology spending until the economy firms, which I think would probably figure into most corporate budgets until the very beginning of the second half of 2002. I talked to our

tech-spending manager here at Merrill Lynch, and we're still in slow mode -- which is the consensus.

Occasionally, I read in magazines about increases in budgets, but I don't get that sense at all in talking to people. If companies open up the spigot even just a little in second-half 2002, that should be reflected in stock prices one to two quarters before that.

7. Everyone usually counted on a big boost in corporate tech spending in the fourth quarter as technology managers try to spend the rest of their budget. Will that happen this year?

That's not going to happen. That doesn't really happen in a recession scenario, and we were heading toward a recession even before Sept. 11. Since then there's been a lot of confusion and an almost total freeze in tech spending, particularly for the big-ticket, long-implementation projects that you might get with an enterprise software company.

The budget flush that you're describing isn't coming. This year, chief financial officers and other senior executives are saying, "Give back whatever you haven't spent." Also, remember that part of the phenomenon that you're talking about with the fourth-quarter seasonality is also based on a stronger than usual period for consumer electronic products, particularly PCs. There's a lot of companies in that PC food chain, and it doesn't look like there's going to be a big demand there.

8. This year many investors have socked their money into bank accounts, rather than the stock market. What would you say to those folks after the losses they've seen?

I don't know if I'd sell tech stocks today because I think it's too late, but I would also advocate holding some cash right now. A lot of these tech stocks' valuations are getting interesting, but if I were a person who

had a lot of money in a money market, I would actually keep it there, at least for the next couple of weeks until we get through this reporting season.

Tech stocks can move fast, so you do have a risk of missing some upside. But on the other hand, I wouldn't recommend anyone having more than 15% to 17% of your equity portfolio in tech stocks because that's in line with the S&P 500's tech weighting. Some people are surprised that I'm not just pounding the table trying to get people to buy, but I think that would be dishonest.

9. Let's talk about some big companies. I'll throw out some names, and you just tell me if you own them in the fund and what your outlook is for the shares. First up: Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report.

I'm bullish on Microsoft because I think that they've given enough cushion in their guidance that they can legitimately make their numbers despite the fact that we know that they have a PC head wind. We own it; it's 2% to 2.5% of our portfolio, compared to about 1% for Cisco. I would not buy Microsoft at today's levels, but I would try to pick some up between 45 and 50. I think that Microsoft's in trouble, too, like everyone else, but I'm pretty optimistic about all of Microsoft's new initiatives -- Xbox, Microsoft.net -- I think the Microsoft long-term story has gotten a bit better, where I could say the Cisco long-term story's gotten a bit worse.

Everybody was excited about data storage, but that business has gotten tougher. What about EMC (EMC) ?

EMC is about 0.33% of the portfolio. Frankly, if it had a pretty big upside move on a given day, I might take the rest of the money off the table. I'm worried about EMC. I do think data storage is important, but even before Sept. 11, Hitachi Data Systems and some other competitors were starting to make some inroads. If EMC got into a hat size or a single-digit stock, I might consider buying some for a trade, but right now I'm just holding what I've got.

Amazon.com (AMZN) - Get Amazon.com, Inc. Report?

Amazon we haven't held in a while. We bought a 0.5% position a couple of months ago because we thought if they came through this fourth quarter as planned with an operating profit, it would get some interest. But we've since sold it. We felt that if we didn't feel comfortable adding more, let's sell.

Lucent (LU) ?

We actually own Lucent. We bought it at about 5. We bought Lucent because we think they're making good progress with their restructuring and cost-cutting. To make a long story short, we spend a lot of time with

CEO Henry Schacht. Their offices are right next to our offices, so we've had him down here several times. We think this is purely a deep value story with not great growth prospects, but we think they're going to get back to profitability within the next year to 18 months. I don't know how much downside risk is in this stock.

10. What are three companies you'd have the most confidence in holding for the next five years?

I'd say Amdocs, Taiwan Semiconductor, and remember I prefer the local shares (TSMC) vs. the ADRs. I'd also buy AOL Time Warner because I really do think that over the long term they're going to be the dominant player in digital media.

Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

imcdonald@thestreet.com, but he cannot give specific financial advice.