If you're planning a long road trip, you don't buy some juiced-up car that your neighbor built in his garage. You want a sturdy vehicle that can make the trip.
The same lesson can be applied to technology investing in this market.
down 31% since March 10, most tech stocks haven't been able to escape the slaughter. Under these conditions, nothing seems dependable. However, investors who don't want to abandon tech altogether can turn to this industry's leaders for some semblance of security.
Leading brand names like networking champion
have avoided the beating received by newer, smaller tech companies. The
index -- the largest 100 nonfinancial companies on the exchange -- is down 26.9%, slightly less than the broader Composite index.
And while putting your portfolio in the hands of tech leaders may mean abandoning dreams of a big short-term score, the tradeoff is you'll be able to get a good night's rest so you can
"The large funds and retail investors will gravitate to the leaders," says Brant DeMuth, a manager at
. "It's normal psychology. It's risk avoidance."
By buying leaders, you should also have less risk going forward. Tech is one broad industry with an incredibly high barrier to entry. "Success feeds on itself. The leaders tend to stay leaders for a long time," says Pat Dorsey, director of stock analysis at
Also, tech's dominant players should come back first in a rocky environment. In a down cycle, they can consolidate, pick up market share by taking advantage of competitors' weaknesses and emerge stronger. More-established tech companies also have an advantage if raising money in the capital markets becomes difficult. "New companies might not be able to raise additional capital in a secondary offering," says AIM's DeMuth. If they can't raise money to continue operating, they could be forced to sell to a larger competitor.
Giants like Cisco and Intel have histories, make money and dominate their respective businesses. These strengths have helped limit the damage on the way down.
"Cisco and Intel have corrected 20% to 25% from their highs. Some of the newer names are at least 50% off their highs," says Doug MacKay, co-manager of the
Red Oak Technology Select fund.
Merrill Lynch's B2B HOLDRs
, a basket of 20 relatively young business-to-business stocks, is down 68.2% since March 10.
"That's just the nature of the beast. Anytime in a correction, I think people who don't know what they own are the first to pull the trigger on higher multiple stocks," adds MacKay.
By "higher multiple," MacKay means stocks with high
price-to-sales ratios. Lofty levels of those indicators may mean that the stock is overpriced, and investors will often sell these high-priced stocks first before unloading those that are trading at more reasonable levels. Of course, valuation is relative.
Mike Eggly, an analyst on the
Northern Technology fund, seconds that thought. Younger tech companies may have great products to sell and sky-high growth expectations, but their market valuations may also be too high.
"The new entrants who may have the best product in a niche also have the highest valuations and have fared badly on stock price," Eggly says.
For example, Cisco has fallen 7% since March 10, while competitors like
have tumbled 38.2% and 62.7%, respectively.
Evidently, Cisco's $12 billion in net revenue last fiscal year actually means something to investors.
is another favorite of MacKay and other fund managers. The company dominates the business of manufacturing storage hardware and software. "EMC is the clear leader in that space as much as Cisco is in networking," says MacKay. Its earnings have been growing at 34% a year over the past five years.
Fund investors who want to stock up on these leaders have several choices in the form of diversified funds and tech-only funds.
I asked Morningstar to screen the universe of U.S. stock funds for those with the largest combined weighting in five popular tech names:
, Cisco, Intel,
. (The funds had to own all five stocks.)
After eliminating funds with less than $100 million in assets and track records shorter than three years, the resulting list was indeed interesting.
The tiny $130 million
Reynolds Opportunity fund had almost 25% of its assets in those five stocks at the end of March.
"We want to own the world's best companies and be long-term investors in them," says manager Frederick "Fritz" Reynolds. "There's been a lot of damage done. In the next year or two, one should do well with these classy companies." Reynolds also owns marquee names like
Despite the fund's small size, it's produced admirable returns. Its five-year annualized return of 32.9% puts it ahead of 93% of its large-cap growth peers.
Beyond that list, a few established technology funds are also known for their fondness for tech leaders and are worth mentioning.
Northern Technology is known for owning the blue-chips of the tech industry but keeps its bets spread across 50 to 80 stocks.
"I don't recall a time when owning inferior companies ever produced superior returns," jokes Northern's Eggly.
Firsthand Technology Leaders fund doesn't necessarily invest in the most-recognized tech blue-chips, but manager Kevin Landis clearly knows his leaders.
, a maker of high-speed gallium arsenide chips, is the fund's top holding. Its one-year return 110% puts it ahead of 84% of its peers.
T. Rowe Price Science & Technology, managed by Charles "Chip" Morris since 1991, delivers extensive exposure to the tech sector and does invest in the major tech names, including Oracle,
and Cisco. The fund's returns are, however, more pedestrian. Its three-year annualized return of 44% puts it behind 84% of other tech funds.
Lastly, don't forget about an
index fund. An investment in an index fund will give you a market weighting of the biggest of the big tech stocks, including
, Cisco, Intel, Oracle and IBM.
If you feel safer with an extra helping of the sector's heavyweights, try one of the funds mentioned above.
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Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.