You know Kevin Landis and his shareholders have ridden the tech tiger because they have the scratches to prove it.

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Landis runs Firsthand Funds, a Silicon Valley-based firm whose six tech funds all have lost more than 45% of their value over the past 12 months. But those losses aren't much worse than the average tech fund's -- and Landis has fared better than most over the long term. His flagship ( TVFQX) Technology Value fund has doubled the S&P 500 and topped 75% of the tech funds out there over the past five years.

But what now? Tech funds staged a thrilling 37% rebound in last year's fourth quarter, but they lost ground in January. Landis thinks a recovering economy should boost corporate tech spending and believes wireless could be the next new thing. That said, he doesn't think investors should blindly stick with their sagging picks; his firm's recent preparations to launch diversified growth funds hint at his own broadening horizon.

What's he buying today? Why does he think networking titan Cisco ( CSCO) is undervalued? Read on.

1. What's the case for tech stocks today?

They will participate disproportionately with an economic recovery, and they're basically no more expensive than they were in August when fundamentals looked a lot weaker. Whether you're looking at overall macro numbers or whether you're looking at tech stocks on a case-by-case basis, the inputs we're getting are starting to argue a little more convincingly that we're in the early stages of a recovery.

Talking With:

Kevin Landis
Fund: (TVFQX) Firsthand Technology Value
Managed Since: May 1994 (inception)
Assets: $1.5 billion
1-Year Return: -51.1%/Trails 69% of Peers
5-Year Return: 12.5%/Beats 75% of Peers
Expense Ratio: 1.83% vs. 1.78% category avg.
Top Holdings:
Cadence Design
PeopleSoft
Raytheon
Sources: Morningstar and Firsthandfunds.com. Returns through Jan. 29.

2. What do you look for in companies before you buy shares?

We start by looking at the most powerful technology trends. We ask, "How is the world going to be different four or five years from now?" Two or three years ago, we were looking at digital technology and flat-panel displays, and those are starting to blossom now. Five years ago we were looking at the buildout of the Internet.

We spot a trend that we think is important, and then we figure out all the companies that are going to be involved in it. We try to figure out the food chain, looking for the most advantageous place to play on it. For example, it does you no good to buy communications-chip companies if they're weak players because then they won't participate. Once we have the best companies that are well-positioned on the strongest trend, we try to find the ones that are the most attractively priced. And we'd like to hold them for two or three years, maybe longer.

Given the sector's nuclear winter over the past two years, have you tweaked your style or started asking different questions?

It's an excellent philosophical question. You'll always make mistakes, and you need to be able to learn from those mistakes. Our core philosophy is to spot trends and get on them early with the best companies. That's what we're going to continue to do.

But I think we're going to draw some lessons from the last couple of years. I think that what a lot of us missed this time was that the end demand was overestimated. If you asked Cisco for documentation on their forecast, they could tell you that a lot of their customers wanted to buy a lot. But you had to go still one level further and ask if all these telecom companies could really sustain that level of spending. It turned out the answer was no, and that's the observation that's blindingly clear in hindsight -- but most of us missed it in 2000.


Dry Season(s)
Landis and his team have taken their lumps
Sources: Morningstar. Returns through Jan. 29.

3. What trends and companies are you looking at now?

Well, we actually believe demand for the wire line side of communications infrastructure will come back. It will probably be the last sector to come back within tech, but it will come back. So that argues well for the optical-networking companies, whether you're talking about Corning ( GLW), Ciena ( CIEN) or Applied Micro Circuits ( AMCC). That group will eventually come back, but they will probably be next year's success story. In terms of this year, we're big fans of wireless, and we think the metrics could turn around quickly here on the cell-phone market, particularly in the U.S.

What companies would benefit most?

Well, we think there's a huge difference when you break open a cell phone between some of the commoditized chips and some of the more tricky elements. We're big fans of companies like TriQuint Semiconductor ( TQNT) and RF Micro Devices ( RFMD).

4. On the flip side, what sleeve of technology are you least excited about?

We have steered clear of the PC sector for years simply because we didn't like the commoditization of the technology. And you can see that the companies that thrive there are either the original two that carved out the defensible positions -- that's Microsoft ( MSFT) and Intel ( INTC) -- or basically just Dell ( DELL), who executed so well. I think in the near term, the PC industry may do pretty well. They might actually be one of the sectors that comes out of this recovery the strongest, but it's not an area that we see a sustainable opportunity. Besides Intel and Microsoft, we're not that interested.

5. In terms of primary vs. secondary players, Lehman Brothers is coming out with a report that basically says tech companies that aren't No. 1 or No. 2 in their business are doomed. Should tech investors just stick with leaders?

I think there'll be room for other players, but today if you think everyone's at a trough valuation, you might as well buy quality companies. Our ( TLFQX) Technology Leaders fund owns the biggest and the strongest companies, while our Tech Value fund looks for bargains. It's at market bottom where those two funds have the biggest overlap. For example, right now we have a big Cisco position in both funds.
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Firsthand Funds' Kevin Landis

6. Do you think that the fourth-quarter rally was a head fake? And do you think it will be many years before we see Nasdaq 5000 again?

Well, the bull case says that the fourth-quarter rally was just the Sept. 11 snapback. That case says we're not that much above the Sept. 10 levels, so we haven't really even had the beginning of that rally. If you compare where we are to where we were in August, things look really good and the stocks look just about as cheap. The bear case says forget all that, forget about why you formed the bottom, you're up 50% from the bottom, the economy's not going to go into recovery, it's just reacting to a few one-time stimuli. I think the bear case is hard to make right now.

To get back to Nasdaq 5000, stock prices would have to more than double. I'd be surprised if it took less than two years, but I could see it happening in four years.

7. Let's play some word association, starting with a company you just mentioned -- Cisco.

Survivor.

What funds do you own that in, and what's your outlook?

We own it in Tech Value and Tech Leaders. I believe Cisco is gaining market share during the downturn, and they will probably gain share through the recovery. They will end up being, believe it or not, a stronger force within their industry than they were before these troubles hit.

Microsoft?

Surprising. Microsoft had a surprising amount of upside on this current set of product cycles, and was surprisingly resilient in a bear market.

Do you own shares?

We own Microsoft in our Tech Leaders fund.

Oracle (ORCL).

Still the database king.

Which funds own shares and what's your outlook?

We own Oracle in our ( TEFQX) e-Commerce fund and our Tech Leaders fund. I think that Oracle enjoys and will continue to enjoy entree into all or many of the important corporate tech accounts simply because they're the database supplier. The open question for them is how much traction can they get with their other products once they're in the door.

Intel.

They're still the microprocessor king. I think the open issue for Intel is their continued limited success in the market for communications chips. My suspicion is that there's a little bit of tension between Intel and Cisco. I think the folks at Cisco have done their homework, and they don't want a single dominant chip supplier. They'd rather have a handful of key suppliers that they can pit against one another.

Do you own shares of Intel in the funds?

We own a little bit of Intel in Tech Value.

PMC-Sierra (PMCS) is a networking-chip company that you owned pretty early?

One of my favorites, it's a networking survivor. What we've noticed over the last couple of years is that the door has really been slammed on networking-chip start-ups. There really is now going to be a separation between the early leaders and anyone coming along behind them. In 1999, if you put down a business plan saying you were going to make networking chips, you could get funded. Try it today. You won't get a dime. That is pretty advantageous for companies like Applied Micro Circuits, PMC-Sierra and Broadcom ( BRCM).

And you still own those companies in the Tech Value fund?

Yeah.

8. About a year ago we asked you for three companies you'd hold for five years. You picked PMC-Sierra, AMCC and BEA Systems (BEAS). Still comfortable with that trio?

Those are still three very good names. I will tell you that I'm worried about what IBM ( IBM) is trying to do to BEA right now, but I'm not worried enough to give up on it.

9. What's your economic outlook? What do you see from here for the next year for the economy and tech stocks?

My economic outlook is a lot like my weather forecast -- I recognize that the experts know a lot more than I do and they still manage to get it wrong pretty often. We're thinking that the economy could be recovering right now, and by the end of the year the pressure will be on for people to get their technology exposure back up. So, we could have a pretty good year.

10. What would you say to folks who bought shares of tech funds right around the top and have held onto their shares?

A stock or fund doesn't know what you paid for it. What you should be doing is configuring your investments based on what you know now. In other words, you don't need to ride the same investments back up. If you've got something that you think will outperform what you own , there's no shame in switching at the bottom.
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.

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