Booyah Breakdown: Tech Stocks - TheStreet

Booyah Breakdown: Tech Stocks

Cramer thinks you should buy tech as a safe haven, but these stocks are not one-size-fits-all.
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Have you tried to buy a pair of jeans lately?

It's mind-boggling. You can get straight-leg, boot-leg, wide-legged, cropped or this reverse fit, which I still don't understand. Then you have to decide on the rise -- low rise, ultra-low rise, or the classic rise. And if that's not confusing enough, you then get to pick your denim color -- dark, sand-washed, black, etc.

Ugh! I just need a pair of jeans that don't make my butt look big!

But it's not that simple. You have no choice but to try them all on to see what fits best.

Unfortunately, buying a technology stock follows a very similar process. Just like you can't ask your girlfriend to pick up a pair of jeans for you, "you can't just go out and buy tech. There's no way," says Mark Mowrey, senior analyst at Al Frank Asset Management.

That's because there are many different sub-sectors of tech. So owning

Dell

(DELL) - Get Report

is not a substitute for owning

Google

(GOOG) - Get Report

. Those stocks cover two totally different areas of the tech world.

But Cramer thinks you should be buying tech these days.

On his Monday July 23 "Mad Money" TV show he said the technology sector is a "safe haven" from subprime. "In fact, tech should benefit from all of the worry that's afflicting the financials," he said

Historically, people have started investing in tech during the fall, but Cramer doesn't believe that people should wait. Therefore, Cramer has been offering his favorite tech stocks on his show, and named

SanDisk

(SNDK)

as his tech winner.

But if you're going to follow skee-daddy's advice, you have to educate yourself in the space, because tech stocks are not one-size-fits-all.

So the Booyah Breakdown is going to help you, uh, break down, the sector.

Bootcut or Wide-Leg?

Analysts will divide the technology sector in many different ways, but however you chose to dissect it, you'll probably end up with similar categories. It's just like going to the

Gap

(GPS) - Get Report

and deciding on the flare, skinny, straight, or classic cuts vs. walking into, say, a

Guess?

(GES) - Get Report

store where your choices are the Foxy, the Daredevil and the Starlet. It's the same cuts, just different -- albeit sexier, names.

So we're going to offer up some subsectors -- nine actually -- to help you get started. But you feel free to break the technology universe any way you want. Just be sure to break it down because all tech stocks are not the same.

"Just because the hands on a watch are moving in one direction doesn't mean the gears inside aren't moving all different ways," says Mowrey, who helped me splice the sector.

So here are the different subsectors of tech:

  • 1. Communication Equipment. Stocks like Cisco (CSCO) - Get ReportTellabs (TLAB) , Ayaya (AV) , Juniper (JNPR) - Get Report and Motorola (MOT) would fall here.
  • 2. Communications Services. That's more like ATT (T) - Get Report, Sprint (S) - Get Report, Vodafone (VOD) - Get Report and Verizon (VZ) - Get Report.
  • 3. Computer hardware. The guys that make the hardware, like Hewlett-Packard (HPQ) - Get Report, Dell (DELL) - Get Report and Seagate (STX) - Get Report, are here as well as the storage guys, like EMC (EMC) .
  • 4. Semiconductors. Basically anyone who works with silicon. That would include the chip makers like Intel (INTL) - Get Report, Texas Instruments (TI) , Micron (MU) - Get Report and Qualcomm (QCOM) - Get Report.
  • 5. Software. This one's easy. Think Microsoft (MSFT) - Get Report and Symantec (SYMC) - Get Report.
  • 6. Internet. This category is catch-all because you can put TheStreet.com (TSCM) , Google (GOOG) - Get Report, Amazon (AMZN) - Get Report, The Knot (KNOT) and eBay (EBAY) - Get Report all in here.
  • 7. Electronic components and equipment. That's for all the companies that make the little bits and pieces that go into your machines, so include stocks like Frequency Electronics (FEI) - Get Report and Network Equipment Technologies (NWK) here.
  • 8. Technology services. This is for all the companies that directly consult technology companies. These days, IBM (IBM) - Get Report should probably be here.
  • 9. Defense. "Many will argue that this is not a tech sector, but try to open a plane. It's the most technologically advanced thing you've ever seen," says Mowrey. So you can put Lockheed Martin (LMT) - Get Report and its peers here.

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

(UNTD)

, 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

(TRFX)

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.

Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback;

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