of Oakmark Select, for example, have been scooping up tech stocks that have had tough going, such as Dell, eBay, Intel, and Yahoo,” says Dolan.
The current attraction of tech stocks, according to Dolan, stems from a combination of relatively low valuations and
strong fundamentals. “Today’s technology companies have slimmed down, cut costs, and cleaned up their balance sheets since the 1990s.” She points to semiconductor manufacturer Analog Devices and communications equipment provider Corning Inc. as good examples of companies that have become more financially sound since the tech sector slumped.
Another observer who’s upbeat on tech is John Blood, vice president of investments at Commonwealth Financial Network in Waltham, Massachusetts. “Many corporations have a great deal of cash on their balance sheets,” he says. “They are likely to use that cash for capital spending and that spending may be largely on technology.” That is, cash-rich companies will invest in systems and equipment to keep productivity up in an increasingly competitive economy.
More spending on technology, in turn, is likely to benefit stocks in that sector. “Pricing power is coming back at some technology companies,” says Lincoln Anderson, chief investment officer and chief economist at LPL Financial Services in Boston. If tech companies can command higher prices, they may enjoy plumper profits and return to favor on Wall Street.
Balancing act
Even if an upturn is in the cards, Dolan is not recommendi
ng that investors load up on tech-heavy funds. “The signs are pointing in the direction of a tech comeback,” she says, “but if and when that will happen is unknown. Your best approach might be to rebalance your portfolio by cutting back on your value funds which have performed very well and increasing your growth funds, including those holding technology companies.”
Portfolio rebalancing is also urged by Anderson. “It’s time to worry about your winners,” he says. “Assets that have had big runs can shift in the other direction.” All the areas that have been leaders recently, including foreign stocks and value stocks and small caps, may be riskier now than they were five years ago.
Think big
Large-cap technology stocks currently look “pretty attractive,” to Rottinghaus. He notes that toward the end of an economic cycle when interest rates are relatively high, smaller companies have more difficulty accessing the funds they may need to grow their business. Larger companies will have the capital to withstand the effects of a slowing economy.
Along those lines, small caps may be in for a year of slower growth, compared with the giant firms in the S&P 500 Index, according to Anderson. “Nasdaq might do even better than the S&P 500,” he says, “because of strength in technology.”
Home runs
Just as investors might do well to move some money from small-cap to large-cap funds, it also may be time to lighten up on funds holding foreign stocks. Anderson believes that some of the money now flowing into foreign stocks, after five straight years of outperformance, stems from the momentum of investors who are chasing what’s been hot rather than investors who