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Finding winning tech stocks is kind of like preparing for a pennant in Detroit, where the Tigers have already won two games just three weeks into the season. With a two-year decline showing no sign of the long-awaited reversal, investing in tech now seems practically pointless to many market watchers.Yet as the manager of (DTGRX) Dreyfus Premier Technology Growth fund, Mark Herskovitz faces that very task. Though he has underperformed the benchmark S&P 500 by 4 percentage points over the past three years, his returns are considered pretty respectable among his peer group. Herskovitz likes Dell (DELL) and Zoran (ZRAN) , a DVD tech supplier. He has fled telecom and hasn't looked back, but he has an interesting thing or two to say about wireless gearmaker UTStarcom (UTSI) and the world's underserved phone customers.

Long-Term Values

Tech has been such a wreck that I've had two investors tell me recently that they feel lucky anymore holding stocks that have only gone down 40% as opposed to 50% or worse. Your job running a tech growth-specific fund must be especially tough, since you really have no place to hide. What has that been like?

Mark Herskovitz:

There will be times in technology when growth becomes modest growth after 15 years of tremendous growth. It's not unreasonable to have a period of consolidation after a period of strong growth. Now, after we go through that period of consolidation, there has always been another period of renewed growth. I'm convinced that will happen. For that not to happen, you'd have to argue that the pace of innovation has dramatically slackened, and that's a pretty extreme position to take.

Where in tech have you found some growth companies?

Mark Herskovitz:

There are a couple different ways to find investments. First is to recognize, while large areas of technology aren't growing rapidly, there are niches that may be seeing very strong growth, as fast as some sectors did during the boom.

Mark Herskovitz
Dreyfus Premier Technology Growth fund

One example is the DVD player, the fastest-growing consumer electronics product in history. We own a company called Zoran, which generates 85% of revenues from semis for DVDs and the other 15% from chips for digital cameras.

We're constantly looking for dominant companies in these fast-growing niches.

The other thing is to acknowledge

that in the sectors where there is little growth, you still have some opportunities. There will always be companies that have rapid growth through consolidation. Dell is a good example of that. The PC industry has been mature for a number of years. But in our view Dell has a sustainable cost advantage in terms of manufacturing and distribution. Dell is ruthless to use that advantage to force consolidation.

Chipping In

Where else are you looking?

Mark Herskovitz:

I think

Taiwan Semi


, our largest position, is another example of a company with a good biz model. When the semi industry began 25 years ago, every company built their own chips. But we are well into a massive transformation of the industry to a manufacturing outsourcing model. The reason is every new generation of chips requires a new level of capital expenditure.

Taiwan Semi is a dominant company that receives outsourced production business. It has grown over 20% a year for a decade, and the industry is so huge -- about $150 billion last year. Around 17% is outsourced, meaning 83% is a potentially available market for this model.

As I recall, you took cover in the Baby Bells early last year but later grew somewhat bearish on the group. And as we've now seen with



latest results, revenues are still slipping, and even the growth elements of their business like DSL are slowing. Do you think SBC's results might offer a preview of the other Bells?

Mark Herskovitz:

We don't own any of the Bells anymore. We were happy to own them last fall when we saw a flight to safety after Sept. 11. Immediately after, we sold those positions. Now we don't own any telecommunications services companies today, and only a few on the equipment side.

What does the service provider situation say about the outlook for equipment suppliers?

Mark Herskovitz:

Prior to 1996, when the Telecom Act passed, telecom equipment was considered a mature business. It became a growth business because of all the new networks that were being built. We had about 20 long-distance networks being built from scratch in the U.S. and many more throughout the world. You had many competitive local exchange companies' networks being built from scratch. You had wireless networks going through upgrades and new competitors coming in.

Now, you've got no one building new networks anymore. You had all that capacity to support very elevated levels of demand, but I don't see from a business point where demand for additional networks is going to come from.

The equipment sector will probably go back to its historical growth rate prior to 1996, which was about 8% to 10% a year.

Crossing the Finnish Line

You said you hold almost no telecom-equipment companies. Which are the ones you do own?

Mark Herskovitz:

We have a position in



and in a real interesting company called UTStarcom. They make a quirky phone system that's a cross between the kind of full-service cellular we have here in the U.S. and a cordless phone you'd have in your house.

It's designed for poor countries because it costs between one-tenth to one-twentieth of the installation cost of full-service cellular. It has limitations -- you can't use it if you travel between different cities, or traveling faster than 40 miles an hour. It's for consumers who don't have any phone service at all and limited mobility. The market for full-service cellular is fairly saturated.

The company is getting business in China, and India and Taiwan, and it's trading at 20 times next year's earnings. It's got a good balance sheet, good management and a unique product for a big market.

I've seen recently that you have had some large software holdings -- what do you like?

Mark Herskovitz:

We like software for a couple of reasons. One problem in technology is that in a downturn you have an excess of inventory. One of the benefits of software is you tend to have less inventory; the product doesn't require much in terms of manufacturing. So when things turn around, software can be a part of technology that will benefit earliest because it has a tremendous amount of leverage.

Another reason is that we spent a decade building data networks, and you could argue that spending will shift from investment in more infrastructure to investment to take advantage of the existing architecture. You spent a fortune building out the network; now you may decide you want to spend more to improve your business processes and design processes.

We own




Rational Software


, which is a good surrogate for the software industry because their programs are used by other software companies in the design process. We also like



; they have a product for contract management. For example, if you buy a certain amount of product within a certain amount of time, you get a price reduction. The problem is it's difficult to keep track of where you are in the process relative to what the contract specifies.

It's a great example of a company that lets people use their existing infrastructure to control operating expenses and keep track of contracts they have with suppliers and customers.

Procter & Gamble


is a big customer and investor with these folks.

Big Growth Plays

Any other places in tech you see growth opportunities?

Mark Herskovitz:



has been highly dependent on PC sales for their revenue growth, but what's going on below the surface is their gross margin.

Their gross margin swings from a low of about 48% to a peak of 64% gross margin. An important part of what determines gross margin is on the cost side. What drives Intel's gross margin up periodically is when they move up to the next manufacturing process. And now they are moving to a 0.13-micron feature size and a larger wafer size. The combination of those two things means we expect to see upside in earnings because they can improve their gross margin.

Also, I think we are seeing a period of weakness from their competitor



. So this will help reduce the pricing pressure on Intel. At this point in their cycle, you don't have to have rapid sales growth to surprise on the earnings side. We expect they will have upsides in earnings for the next year or so, even though their end markets are mature.

One thing I've heard lately is that hedge funds are active but that mutual funds are not buying much in tech these days. Any truth to that?

Mark Herskovitz:

We have high trading volumes each day. I can't believe that's just hedge funds, but I would agree there is a lot of cash on the sidelines. In spite of all the pain we've endured in tech the past couple years, I don't think people have given up on the fundamentals long term. So it's probably a question of timing and making sure things aren't collapsing before people decide they want to get back into the sector. At least I hope so, anyway.

Thanks, Mark.