In the current slow- to no-growth economic environment, technology companies have a choice: Attack new markets with a flood of innovative products or cut costs. Depending on what path companies take, technology investors are left with four stock-picking options to consider.

Option No. 1: Go with technology sectors that don't face a huge excess capacity overhang. According to Morgan Stanley, computer makers are running at only 61.8% of capacity, compared with nearly 85% during the tech boom years in the late 1990s. With demand expected to increase by only single digits this year, many technology companies won't be able to grow their way out of the slump. Many, but not all.

Wondering why the much-maligned Internet group has outperformed the rest of the technology sector? Yes, many of these stocks were among the most heavily shorted in the market, and so they took off like rockets when the shorts were forced to buy shares to cover their positions. But stocks such as Yahoo! ( YHOO), up 53% year-to-date; eBay ( EBAY), up 40% in 2003; and Expedia ( EXPE), up 91%, aren't struggling with excess capacity. True, if the economy doesn't come through in the second half, Yahoo! won't pull in the huge increases in advertising revenue that Wall Street expects, but the company also doesn't face competitors that are cutting prices to keep factories running. In the case of a Yahoo! or an eBay or an Expedia, any pickup in unit sales will fall right to the bottom line. And these companies' business structures are leveraged so that increases in unit sales turn into bigger increases in revenue and even bigger jumps in profit. That's quite a contrast to the computer makers who could well see a 1% decline in revenue even with a 6% climb in unit sales.

Option No. 2: Go with companies that have the ability to take market share from competitors while making a profit. That kind of attack can be especially lucrative if the company can go after the juiciest part of a competitor's business ... which is exactly what Dell Computer ( DELL) is doing to Hewlett-Packard ( HPQ) in the printer business. Dell recently launched the Dell A940 all-in-one printer. Priced at $109, after a $30 rebate, the machine combines an inkjet printer, scanner and copier. But the hardware is really just the foot in the door, because Dell knows that by far the most lucrative part of Hewlett-Packard's printer businesses isn't the printer itself but the supplies of ink and paper that a customer buys to keep the printer running. The A940 comes with software that automatically notifies the user when it's time to buy more ink and then lets the user click into Dell's online store to buy the needed supplies. Without any shipping or handling fees.

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