Going Beyond Google
Seduced by the idea of Google's reaching $600 a share? Don't be. Despite the high-wire acts of a few Internet stocks, it hasn't been that easy of late making money in technology stocks. The Nasdaq eked out only a 1.4 percent gain last year. "We saw just as many stocks down as up on the year," says Theodore Wendell, comanager of the $92 million Columbia Technology Fund, which gained 16.8 percent last year. "You really had to choose stocks well to outperform."
That could be the case again in 2006 unless a much-ballyhooed corporate spending boom materializes. "We think there's a lot of potential for corporate spending to pick up," says comanager Wayne Collette. "Companies have plenty of cash and a capacity need." Now plenty of tech investors have been forecasting a corporate spending binge for some time, and it hasn't panned out. But Charles Schwab investment strategist Liz Ann Sonders is pretty sure that "the turn is here" for business tech purchases and "spending on technology upgrades and new equipment is no longer considered either luxurious or blasphemous." The Columbia managers aren't quite so sure. For some clues to see if 2006 is finally the year, the Columbia managers will be closely watching the spending plans of large corporate customers like General Electric and Citigroup. If businesses do start spending, Wendell mentions IBM and Intel as obvious beneficiaries.
Another good sign for tech investors in 2006 is that the traditional end-of-year tech rally began later in 2005, which means it may last longer into 2006. Plus, the sector's valuations are beneath their 10-year average.
Game boys. If business continues to keep stockpiling cash, there's still plenty of action on the consumer side. One promising such area is video gaming. Microsoft has already released its next-generation Xbox 360, while the PlayStation 3 is coming this spring or summer. These moves benefit ATI Technologies and Nvidia, which supply graphic chips for the new consoles.
Collette and Wendell also fancy the hardware suppliers in the wireless world. Chipmaker Broadcom and cellular tower owners Crown Castle and American Tower are favorites. One reason they prefer hardware over the service providers is that the service market in the United States is saturated and competition is cutthroat. The only service providers the fund owns are those in foreign markets like Vietnam and Brazil. "There are places where you have maybe two or three service providers, and penetration is low, 2 or 3 percent," Collette says.
The pair also continue to favor the same Internet stocks as everyone else: Yahoo!, eBay, and, of course, Google. Still plenty of growth there, they contend. "Google's just starting to get into a lot of areas, like shopping, where it can enter and grow," Collette says. Maybe, but the tech investor will need more than just Google to shine this year.
This story appears in the January 16, 2006 print edition of U.S. News & World Report.