Tech Trauma Should Ease in 2010 As Demand Climbs
Andrew Leckey

Tech trauma is a modern investor ailment.

While the patient is aware that technology stocks are symbolic of the near- and long-term promise of the economy, their erratic movement can spike blood pressure beyond normal limits.

Not even last year's healthy tech rebound can completely erase nightmares of the hyperventilation-inducing year that preceded it.

The prescription for 2010 therefore requires tech stocks so compatible with needs of a recovering business world that the patient can once again sleep comfortably.

"Technology growth themes in 2010 will be the rise of the Internet and its infrastructure, as well as tremendous growth of wireless and smart phones," predicted Michael Lippert, portfolio manager of the $141 million Baron iOpportunity Fund in New York, which rose 62 percent last year and has a five-year annualized return of 5 percent.

Largest position in Lippert's portfolio for some time has been Equinix Inc. (EQIX), a global provider of data centers and Internet exchanges. By hosting equipment for many customers, it offers services at cheaper rates than customers achieve on their own. As need for information storage and services increases, he expects the company's market capitalization to grow 20 percent in 2010.

Growth is ahead, but how much is the big question. It will pay for investors to stick with technologies most in demand.

"We think 2010 will have three to five percent growth in information technology spending, compared to the normal IT spending of about 11 percent per year since 1960," said Samuel Wilson, co-director of technology research for JMP Securities in San Francisco. "With slower economic growth, technologies that save money are going to do especially well."

That's why he likes shares of Salesforce.com Inc. (CRM), a customer relationship management software firm with nearly 50,000 customers worldwide. Its software is obtained by customers through their Web browsers on a subscription basis, saving smaller and medium-sized companies significant IT costs.

Companies benefitting from pent-up demand can also provide a restful year.

"Some technology demand has gone unsatisfied, specifically memory chips," observed Roger Kay, president of Endpoint Technology Associates Inc. consulting firm in Wayland, Mass. "As the recovery began, some companies found themselves in a position to dictate prices due to the undersupply."

Micron Technology Inc. (MU), the American memory-chip manufacturer, is recommended by Kay because of rising demand for its products in high-end mobile phones and personal computers. The capital spending cuts that took place in early 2009 coupled with greater subsequent demand have placed Micron in a strong pricing position.

"I'm bullish overall on tech because I think the sector is going to have a good year," added Kay, who expects the economic recovery will show increases in hiring in the second half of 2010. "The thing I have a hard time predicting is whether that's already discounted in the stock prices or not."

Don't overlook the familiar tech names that may have interesting new story lines.

For example, Kay likes Microsoft Corp. (MSFT) in expectation of a decent uptick in its stock because many companies skipped buying the Vista operating system and are therefore likely to be buying Windows 7. He favors Dell Inc. (DELL) because it has streamlined its business and a significant portion of revenues will come from the commercial segment. It has found that corporate solutions such as storage, servers and services are more profitable than the consumer segment.

"The next-generation data centers are actually cost-saving projects and that is why we like the stock of Cisco Systems (CSCO) and EMC Corp. (EMC)," said Wilson. "On the other hand, in consumer electronics I think gaming is long in the tooth now, with the Wii, PlayStation3 and Xbox360 gaming systems doing nothing, and I'm also not sure manufacturers of 52-inch televisions sold at low prices made a lot of money during the Christmas season."

Lippert's Baron iOpportunity Fund (BIOPX), a "no-load" (no sales charge) fund that requires a $2,000 minimum initial investment, has some proven names among its 56 stock holdings.

"Although it is a smaller holding for us, Amazon.com Inc. (AMZN) is another company we like," said Lippert. "It is well-run, an innovator and the best consumer experience on the Web."

The Gartner Inc. research firm, Lippert noted, has projected that smart phone sales were up 26 percent in 2009 and should grow 49 percent in 2010; 51 percent in 2011; and 30 percent in 2012. It should therefore come as no surprise that iPhone manufacturer Apple Inc. (AAPL) and BlackBerry maker Research in Motion Ltd. (RIMM) are highly recommended by both Lippert and Wilson for wary investors seeking safer tech bets.

Apple will likely be selling more than 100 million smart phones worldwide by 2013 and have a 20 percent share of that lucrative market, Lippert expects, which is why the firm is a significant holding in his portfolio.

Research in Motion is a smaller portfolio holding that is simply "too inexpensive not to own," he believes. The overall market growth of smart phones will be so strong that it could lift his holdings of Palm Inc. (PALM) as well, he said.

Finally, wireless tower companies will be direct beneficiaries of the growth in smart phones and the Internet, with American Tower Corp. (AMT) and SBA Communications Corp. (SBAC) among his holdings.