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Recession or no, a slowdown is coming. The forecasters at Reuters say companies in the Standard & Poor's 500 Index ($INX) will generate earnings growth of 10.1% this year, down from 14.5% in 2006.
Last quarter, the S&P 500's earnings grew at a double-digit pace for a record 18th consecutive quarter, but a slower pace is hardly unexpected.
Reuters expects several sectors to defy this headwind, most notably technology stocks, which it expects to post breathtaking earnings gains of 23%.
Driving those gains will be major releases of new consumer technologies, including the Windows Vista operating system by Microsoft (MSFT, news, msgs), and of enterprise software. (Microsoft is the publisher of MSN Money.)
"Technology is a product-driven industry," notes Jeffrey Rottinghaus, the manager of T. Rowe Price Global Technology (PRGTX).
Rottinghaus' fund is one of five that I consider the best of the high-tech breed. The others are Buffalo Science & Technology (BUFTX), Jacob Internet (JAMFX), Allianz RCM Technology A (RAGTX) and Waddell & Reed Advisors Science & Technology A (UNSCX).
Ivy Science & Technology A (WSTAX) is a clone of the Waddell fund and run by the same manager.
The five top funds pursue different strategies to deliver their returns, including the kinds of technologies in which they invest and the marketplaces in which they shop. But they have demonstrated consistently superior returns in their highly competitive sector. You can choose among them based on how they would fit among your other holdings.
Nearly all investors were burned by tech in the bear market of 2000-02, and being skittish about the group is natural. But I'm confident tech will outperform the market this year as lush earnings become harder to find elsewhere.
A tech optimist, again
Of course, I said the same thing one year ago, in this column. But so did Rottinghaus."We were expecting the Vista release, the new video-game products (such as Wii and PlayStation 3) and Yahoo's (YHOO, news, msgs) Panama product, and all three were delayed," he says.
In addition to domestic markets, Rottinghaus focuses on foreign bourses, where about 32% of his fund's $138 million of assets are deployed. "Some undervaluations of U.S. technology equities have been corrected," he notes. "It's not as cheap as it was last year."
Taiwan is still cheap, however, due in part to political difficulties there. Rottinghaus looks for well-managed companies with large and growing markets, such as Hon Hai (HNHPF, news, msgs), an outsourcer for computers and electronic gadgets, and Delta Electronics, which makes power supplies for PCs, flat-panel TVs and video games.
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His fund's 10% return in 2006 benefited from a big run-up in India, where he has since taken profits. The fund still has stakes in outsourcers like Infosys Technologies (INFY, news, msgs) and enterprise developers like Satyam Computers (SAY, news, msgs).
Rottinghaus has been at his post less than a year, but he formerly had tech-analyst and portfolio-management duties for other funds and is part of T. Rowe Price's deep bench of long-term-minded investors. Morningstar analyst Arijit Dutta recently noted, "While Rottinghaus is still untested in a leadership role, what we have seen so far bodes well for the fund."
A crash survivor
Ryan Jacob is also a globalist, enamored in particular of China, where his eponymous Internet fund has deployed about 20% of its $93 million in assets."The middle class in China is as big as the entire population of the United States," he says.
Jacob was a Wunderkind in the late 1990s as manager of Kinetics Internet Fund (WWWFX), which shot up 200% in 1998 and again in 1999. He launched his own fund at the peak of the Internet bubble, only to see it crash in the bear market. As of Dec. 31, the return since his fund's inception has been a negative 16.8%.
But it doubled in value in 2003 and has since beaten both the market and its group. Lipper has ranked it among the best tech funds in total returns and in the consistency of those returns.
Jacob's biggest stake is in Google (GOOG, news, msgs). Despite that stock's $500 price tag and ratio of most recent earnings to price of 62, he says it's cheap. "At 35 times forward earnings, we believe Google is attractively priced, considering it will grow over 50% annually for at least the new few years."
Jacob Internet's striking volatility will turn off most investors, as will its expense ratio of 2.32%, which is about a quarter higher than the average of the group. But Jacob has proved he has the skill to identify the sector's most highflying companies and the guts to stick with them.
A volatile class leader
Allianz RCM Technology is managed by a company that Walter Price established in the 1970s, giving him one of the longest tenures in a sector where the average manager has been on the job 3.6 years, according to Morningstar."Where we've been successful is finding large themes or large changes in industries that result in high growth for a long period of time," Price says. "Then we try to find the companies within that subsector that are best positioned to capture value. Those tend to be the great stocks."
An example is Nintendo (NTDOY, news, msgs). "Rather than just battling for a share of the 10% to 20% of the population that plays video games, they've focused on expanding the population into other groups, including more-casual users and older people who are interested in improving their health or social experiences with DS or Wii," he says.
Nintendo DS is a handheld game console. Wii, pronounced "we," is an advanced game console that Nintendo claims appeals to a broader audience than Microsoft's Xbox 360 or Sony's (SNE, news, msgs) PlayStation 3.
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