Bright Spots In A Tough Market

Don’t call it a comeback, but technology stocks were a standout in 2007. Consider that the tech-laden NASDAQ composite index closed the year up 9.8%, its best finish in four years. This well outpaced the S&P 500, which rose just 3.5%. And in the eyes of Eugene Profit-who oversees some $1.4 billion in assets for his firm, Profit Investment Management in Silver Springs, Maryland-tech has the stamina to keep climbing. That’s promising given the fact that tech stalwarts have made impressive moves. Witness that shares of Google and Microsoft were up 71% and 20%, respectively.

Profit, in fact, has boosted his position in tech stocks to about 24% for the portfolios he manages for government and private-sector pension funds, as well as the Profit fund (PVALX). Some of his largest stakes are in Cisco Systems (CSCO), Intel Corp. (INTC), and Western Digital (WDC). In 2007, the Profit fund rose 9.0%, and posted a five-year annualized return of 13.5%.

Given the seismic rumblings of late, what lies ahead?

We’re nervous in the short term. The housing slowdown is having more impact than a lot of investors thought initially and the credit crunch’s casualties seem to reach beyond home financing into private equity deals. Commodity costs are high-especially the price of oil. A very large share of corporate profits come from overseas, and growth has been soft. The Fed has started lowering rates, but we probably won’t see the full impact of the moves for another 12 to 18 months. In all, we have a prescription for a pretty weak economy. That doesn’t mean the stock market will be down over the next 12 months, but that said, we’re a bit more contrarian than many.

Your weighting in tech seems to indicate corporate spending will remain strong-what’s your take on the sector?
You usually want to hide in consumer staples and healthcare companies in a market like this, but there are some compelling reasons to be in tech. Yes, there are concerns that consumer spending will drop off. The tech sector, at the same time, hasn’t had the benefit of a major upgrade cycle since Y2K. Now that corporations have to lift spending to bring on the latest updates, we think the right tech companies will get the bottom line protection they need in this economy.

As growth managers, how do you balance your expectations for bottom line gains with stock prices?
We say we’re valuation-sensitive growth investors. Right now, our stocks on average have a projected three-year annual growth rate of 12% or more. We aim to invest in shares that have a price-to- earnings multiple that is below 1.5 times the company growth rate. That way, we try to buy into a company’s growth at a reasonable price-within limits.

What’s a good illustration of this approach?
We’re bullish on Jabil Circuit (JBL), a semiconductor chip company. Jabil’s circuits are used in cellular phones and products put out by Nokia, Boeing, and Cisco. Circuit makers have been under pressure because of the perception that they are vulnerable because of