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Four Winning Tech Stocks

Steven Goldberg

These companies are loaded with cash, should be able to increase annual earnings at double-digit rates and are favorites of a veteran fund manager.



Many investors still bear scars from their foray into tech stocks in the late '90s. The tech-laden Nasdaq Composite Index peaked on March 10, 2000, at 5049. On March 9, 2009, it hit a six-year low of 1269, a staggering 75% below the high.

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When it comes to investing, however, recent history is rarely prologue. At the 2000 peak, many of the tech giants carried triple-digit price-earnings ratios. Since then, some have gone out of business, but others have grown rapidly, building durable franchises in an industry that is now far more mature. All this as their stock prices plunged.

No, they're not as cheap as beaten-up bank stocks or the automakers, or any of a host of other companies that are losing money and in debt up to their eyeballs. But this may be a chance to pick up tech stocks trading at lower share prices than we'll ever see again. P/Es look relatively high, but that's because earnings are depressed in the deep recession.

Spiros "Sig" Segalas, 75, the veteran manager of Harbor Capital Appreciation (symbol HACAX), currently has 40% of the fund in technology. Segalas invests in the highest-quality companies he can find and doesn't pay much attention to their prices.

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I think his approach is tailor-made for today's market. Segalas invests only in premier tech firms that are boosting their market share and that should be able to increase annual earnings at double-digit rates. "They're all loaded with cash," he adds. Whether you buy his favorites or buy his fund, I think you'll be amply rewarded. (Harbor's investor share class, which launched in 2002 under the symbol HCAIX, charges slightly higher expenses.)

Harbor Capital Appreciation has delivered relatively good, if streaky, returns. Over the past ten years through May 20, it lost an annualized 2%, putting it in the 41st percentile among large-company growth funds, according to Morningstar. This year, the fund is up 11% -- ten percentage points better than Standard & Poor's 500-stock index.

Since 2000, Segalas says, many businesses have been reluctant to buy new technology. "Tech equipment at a lot of companies is getting old," he says. "There will be an upgrade cycle, and there will be some substitution of technology for employees."

The third quarter of the year has traditionally been a strong one for tech stocks, but this year they have already taken off. Between March 9 and May 26, the Nasdaq soared almost 38%. Tech has hardly led the market, though. That honor has gone to the more downtrodden sectors, such as banks and department stores. "Over the past two months, the poorer the growth a company had, the better its stock did. This happens at times, but it doesn't last," Segalas says.

Four Harbor tech winners

Segalas's four tech picks start with longtime favorite Amazon.com (AMZN). The discount Internet retailer has plenty of room to expand from its dominant businesses in books, CDs and DVDs. With superb technology and a huge and expanding customer base, it continues to grow rapidly-and to increase profit margins. At its May 21 close of $75.96, the stock sells at 47 times the average analyst earnings estimate for 2009 of $1.63 per share. Analysts expect earnings to rise 26%, to $2.05 a share, in 2010. But Segalas believes Amazon will grow faster than that, justifying the rich P/E.

Apple (AAPL) has revolutionized consumer technology in recent years with the iPod, iTunes and the iPhone. Like most Apple bulls, Segalas worries about the health of chief executive Steve Jobs. The company has announced that Jobs, who is on medical leave, will be back at work by the end of June. If he can't return, Segalas says, "that would be a long-term negative because Jobs is a genius."

But, Segalas says, the management team that Jobs assembled in the late 1980s remains in place for now. Segalas and his team predict earnings of $5.50 per share for the fiscal year that ends September 30 and $6.30 for the September 2010 fiscal year. The stock, at $124.18, sells for 23 times this year's earnings estimate and 20 times next year's.

Qualcomm (QCOM) is not only the dominant maker of chips for wireless phones, including smart phones, it also owns patents on CDMA technology, which has been adopted worldwide. The patents pay a growing royalty stream. Now that lawsuits with Nokia and Broadcom have been resolved, Segalas expects Nokia to become a big Qualcomm client.

Analysts estimate that Qualcomm will earn $1.69 per share for the year that ends September 30 and $2.29 for the following year. At $41.69, the stock's P/E is 25 on this year's forecasts and 18 on next year's.

It's not just the thinning ranks of Wall Street traders who carry BlackBerries nowadays. Increasingly, Canada-based Research In Motion (RIMM) seems to be reaching, well, almost everyone with its product. "The handset market is down quite a bit, but the smart phone segment is growing very rapidly, led by Apple and RIMM," says Segalas. He estimates that Research in Motion will earn $4 a share for the 12 months ending next February and $5 the following year. At $72.98, the stock trades at 19 times February 2010 estimates and 16 times February 2011 forecasts.

Steven T. Goldberg (bio) is an investment adviser.




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