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Patent play
While cell-phone makers are battling to entice buyers with new bells and whistles, a little-known company stands to gain no matter which brand comes out on top. InterDigital Communications (IDCC) owns more than 6,000 patents on wireless technologies. Founded more than 30 years ago, it has pocketed more than $1 billion in royalties, primarily from the sale of cell phones. Owning intellectual property is a marvelous business because there is no manufacturing cost and no inventory. InterDigital, which had close to $500 million in revenues last year, employs just 320 people, mostly engineers with advanced degrees.
Still, the business is not without risk. Persuading manufacturers to honor patents can be an expensive process that sometimes requires filing lawsuits. Big one-time patent awards can make revenues irregular, and a slowdown in cell-phone sales is, of course, bad news. InterDigital typically collects 1% to 3% of the wholesale price of a phone.
The stock fell 20% in December after InterDigital warned that revenues for the fourth quarter would fall short of expectations. But the mid-January share price of $34 represents a good opportunity as the industry makes the transition to the new 3G standard. InterDigital says its goal is to collect royalties on the sale of every 3G handset (up from 35% to 40% currently). In the best-case scenario, the company says, it would see $1.4 billion in 3G revenues annually by 2010.
The three best tech funds
As anyone who owned technology funds during the 2000-02 bear market knows, they are among the most volatile on the planet. Still, owning a fund should be less risky than buying one or two individual tech stocks. We consider the following three funds to be the best in the category. With tech stocks on the mend, you can use any one of them to boost returns without having to worry about picking individual companies. Just be sure to use them sparingly.
You'll be hard-pressed to find more-experienced tech-stock pickers than Walter Price and Huachen Chen of Allianz RCM Technology. Each has invested in tech stocks for more than 20 years. In 1995, the duo launched RCM's institutional shares, which returned 15% annualized over the past decade to January 3. Those results beat other tech funds' returns by an average of eight percentage points per year. Price and Chen buy shares of U.S. and foreign companies that they think can rise at least 50% in the next year or two. The fund's 47 holdings, a mix of blue chips and more-speculative stocks, include Nintendo, Google and Microsoft. RCM's newer D shares (symbol DGTNX; 800-223-2413) are available without a sales charge through discount brokers. Annual fees of 1.64% are slightly less than the average for the category.
A more diversified choice is Fidelity Select Technology. At last report, the $1.7-billion fund (FSPTX; 800-544-8544) held shares of 108 mostly large and midsize companies in various technology sectors. Charlie Chai, who took the fund's helm in January, had managed a similar fund, Fidelity Advisor Technology, for two years. Chai is supported by Fidelity's deep bench of analysts. Select Tech, which sports a modest expense ratio of 0.93%, returned 12% annualized over the past two years, a bit more than the category's average.
Exchange-traded funds, which trade like stocks, are a cheap and simple way to add technology to your portfolio. Technology Select Sector SPDR (XLK), for example, holds the tech stocks in Standard & Poor's 500-stock index. Its ten biggest holdings, which include Microsoft and Cisco Systems, account for more than half of assets. Boosted by a slug of telecommunications stocks, the ETF returned 12% in 2006, five percentage points more than the average tech fund. Rounding out its appeal is a minuscule 0.26% annual fee.
Key numbers: The scoop on seven promising tech stocks
With the exception of eBay and Symantec, our picks are all midsize companies. Companies of that size can still grow rapidly, but they are generally strong enough to withstand technology downturns.
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Data to January 17. *In the past 12 months. **Estimates for 2007 calendar year. #For the fiscal year ending June 2008. ##For the fiscal year ending March 2008. Source: Thomson One, Yahoo.
