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Tech Stocks

Tech Leads the Market Rebound

A top-ranked fund manager tells which stocks to buy.

Paul Wick has managed Seligman Communications and Information fund since 1990. For the past 15 years, the fund has returned 10.3% annualized, 2.6 points ahead of the typical tech fund.

Tech stocks were leaders in the market's rebound beginning in early March. Do they have much running room left?
Any group that does well in the early stages of an economic rebound has already gone up a whole bunch in the stock market based on hopes and prayers, and because of short sellers covering their bets. There's no sector of the economy that has growth written on it more than tech. Some areas have gone up too much, including plenty of companies that are still losing money. We're not fans of many semiconductor firms.

What is worth buying now?
Certain areas have a higher degree of predictability, with a large chunk of revenue from software-maintenance fees or subscription licenses. We expect those companies to hold up well, and their stocks are not overpriced. We're positive on software companies Parametric Technology (symbol PMTC) and Synopsys (SNPS). We also like Amdocs (DOX), which provides billing software for telecom and cable companies.

Security vendors we like include McAfee (MFE), Symantec (SYMC) and Check Point Software Technologies (CHKP). Riverbed Technology (RVBD) makes hardware that improves the performance of a network -- for example, between a satellite office and headquarters. In video games, Activision Blizzard (ATVI) has the strongest slate of products, and the stock is reasonably priced.

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In general, what do you look for in a tech stock?
We want a business that's desirable from a financial standpoint, in terms of cash generated and return on capital, as well as one with a good competitive dynamic and growth potential. How valuable is the installed base [a measure of its products already in use]? And how valuable is the franchise to a potential acquirer? A plausible takeover target is not a must-have, but it's a nice-to-have.

Tech stocks never used to be considered big dividend payers, but that's changing. Are they yield plays now?
The tech industry has more cash and less debt than any other industry. More tech companies have started paying dividends, but plenty still don't. I still think yield seekers should go elsewhere.