Like many other areas of the investments market, science and technology stocks have been stuck in a relatively narrow band for some months, largely because of concerns of slowing global growth. Yet fund managers are confident that the malaise will abate, and argue that on a selective basis, there are many attractive opportunities.

“We’re in a hiatus, which we hope will resolve itself to the upside,” says Ian Ainsworth, lead manager of Mackenzie Universal Technology Class and senior vice president of investments with Toronto-based Mackenzie Financial Corp. “We have a lot of negative news about U.S. employment and housing statistics, and also from China. But there are some things that are positive.”

First, he notes, China can, if necessary, quickly respond and stimulate its economy. Second, there are indications that U.S. employment should pick up. “Temporary employment numbers are extremely high,” he says. “That suggests there’s a pent-up demand for real hiring. If an enterprise has a better conviction about the economy, then those jobs will be converted into real employment.”

Moreover, although U.S. companies are sitting on a veritable mountain of cash, so far they are reluctant to spend it, Ainsworth adds: “The ratio of capital spending to depreciation is almost at a 40-year low. Companies have not spent a lot on capital goods in [the U.S.].”

Although there are so-called “springs” in the economy, as Ainsworth describes them, the exogenous shocks keep coming. “There is always this overlying cloud,” he says, referring to sovereign debt crises in Europe and credit issues in the U.S.

And there could be further challenges in the U.S. if there is a Republican-led upset in the elections for the U.S. Congress this autumn: “There is a risk we won’t have the flexibility on the fiscal side if we have another downturn, following another exogenous shock.”

In the midst of the gloom, Ainsworth, who works alongside Mackenzie vice presidents Mark Grammer and Wendy Chua, argues that some technology companies have been doing well, if not prospering in the tough economy.

“We’re trying to find companies that have such attractive payback periods for customers that they tend to grow even in tough times,” says Ainsworth. “All tech companies are susceptible to the economy. But the better ones will grow and have higher earnings by the end of the recession.”

From an asset-allocation viewpoint, 22% of the Mackenzie fund’s assets under management are in semiconductors, 20% in communications equipment, 12% in software, 16% in storage and computers, 19% in health care (medical devices and pharmaceuticals), with smaller holdings in miscellaneous areas and cash.

A growth-style manager, Ainsworth seeks to capture the expansion of network systems that manage data and video flow on smartphones. One company he likes in this area is California-based semiconductor firm Netlogic Microsystems Inc.: “[It] provides knowledge processors in almost every piece of router equipment. Now, [the firm is] getting into multi-core network processors that will allow [routers] to process all this information very rapidly.”

Acquired about six months ago, Netlogic stock is trading at US$31.90 a share. Ainsworth’s target is US$38 within 12 to 18 months.

Another favourite in the Mac-kenzie fund’s 65-name portfolio is Seattle-based F5 Networks Inc. A software developer, it used to be active in optimizing so-called “wide-area network” systems but has evolved into building so-called “application delivery controllers” used in data centres. “[It is] at the forefront of ‘cloud computing’,” says Ainsworth, referring to the growing network of remote servers that many corporate clients have come to rely on.

A dominant player in this space, F5 Network’s earnings are growing by around 40% a year. A long-term holding, the stock is trading at about US$84.40 a share.



Investors have been ignoring the fundamentals, with the result that technology valuations are lower than justified, says David Eiswert, manager of TD Science & Technology Fund and vice president at Baltimore, Md.-based T. Rowe Price & Associates Inc.

“There is a sense that March 2010 is the peak,” he says. “Because of that focus, investors are saying it’s a reason not to own these companies.”

Yet, he argues, these investors are ignoring the fact that many technology companies are in much better shape: “There has been a transformation of management teams, supply chains and how they manage their manufacturing. These companies are delivering near-record operating margins and near-record free cash flow, one year after a recession. There’s been no technology bubble in the past decade, and companies have not overspent. And valuations are at historically low levels. Tech is cheap relative to the market.”
@page_break@He adds that another contributing factor is the rapid ascendancy of Asia and its growing purchasing power.

Consequently, Eiswert argues, the market malaise offers opportunities based on longer-term trends: “When we hear investors say, ‘I know it’s cheap, but it’s decelerating so I can’t own it,’ then we say, ‘Let’s buy the best ones.’ It’s one of the best times to buy technology companies.”

A growth-style investor, Eiswert has about 13% of the TD fund’s AUM in semiconductors, and 7% in semiconductor-making equipment. There is also 18% in software companies, 15% in communications equipment, and smaller weightings, such as 9% in Internet software and services.

Running a 96-name fund, Eiswert likes firms such as California-based Cisco Systems Inc. The maker of routers and Internet gear is “a very interesting risk-return story,” he says: “Enterprise IT [information technology] is strong. And Cisco has a very strong position in both voice and data.”

Cisco has a videoconferencing unit called TelePresence, and has expanded further into so-called “unified communications” through its acquisition of Norway-based Tandberg, a videoconference supplier.

A long-term holding, Cisco stock is trading at roughly US$23.60 a share. Eiswert has a target of US$26-US$28 a share in the next year.

Another favourite is Lam Research Corp. The California-based company makes semiconductor equipment, including so-called “etch” systems used in making D-RAM and NAND flash memory chips.

Acquired in the autumn of 2009, Lam stock is trading at US$42.80. Eiswert believes it could be trading in the mid-US$50 range in 12 months.



From a macroeconomic perspective, the technology sector is on hold, waiting for more positive economic data that will build confidence and boost spending, says Cameron Scrivens, co-manager of RBC Global Technology Fund and vice president with RBC Global Asset Management in Toronto.

“There was a huge ‘underspend’ [in technology] over the past number of years because it was an easy place to make cuts,” he says, adding that the 2008 financial crisis forced corporate clients to postpone any plans to upgrade networks or buy new PCs. “Expectations are there should be an ‘overspend,’ and people should be replacing their PCs and software because they haven’t done so for a long time.”

Although there was a recovery in early 2009 in technology spending, there is a fear that slowing growth will lead to an inventory correction, says Ray Mawhinney, co-manager of the fund and senior vice president with RBC Global Asset Management: “That’s what is bothering technology companies, generally speaking. After the recovery in 2009, the feeling is that some semiconductor companies may have supplied too much inventory. There may be a temporary inventory correction.”

Talk of a double-dip recession is also in the air. “It’s always a concern, even if companies don’t see it yet in their business,” says Mawhinney. “They don’t want to get overextended and find out there is a double-dip. They are willing to moderate their expenditures, particularly if there is a risk out there.

“And there is a risk in Europe,” he adds. “It’s not restricted to Greece, but [for] other countries such as Italy and Spain. There are large areas to worry about. Our feeling is that we’re not going to see Financial Crisis 2.0. But there will be a moderation of growth.”

But Mawhinney and Scrivens remain optimistic on technology stocks, largely because concerns about Europe are being addressed and priced into the market.

Mawhinney and Scrivens are growth-style investors and have about 35% of the RBC fund’s AUM in semiconductors and semiconduc-tor equipment, as well as 19% in software, 16.5% in computers and peripherals, 11% in communications equipment, 8% in Internet software and services, and smaller weightings in areas such as electronic equipment and instruments.

One top holding in the 83-name RBC fund is California-based Broadcom Corp., which makes semiconductors for broadband digital communications of voice, data and video. Says Mawhinney: “[It is] moving toward a concept known as ‘systems on a chip’ — putting more functions on one chip. For semiconductors to work, not only do you need volume growth, but you also need a product cycle story. Broadcom has some new products in wide-area networks and ‘voice over Internet protocol.’ [It is] leading and taking market share from competitors.”

Acquired last year, the stock is trading at about US$37.70 a share, or 15 times 2011 earnings. The target is US$45 a share within 12 months.

Another large holding in the RBC fund is Massachusetts-based EMC Corp., a leader in data-storage systems. Scrivens says one of EMC’s most interesting features is that it has a large stake in California-based VMware Inc., a so-called “virtualization software” company that is benefiting from the growing cloud-computing phenomenon.

A long-term holding, EMC stock is trading at roughly US$20.30 a share, 20 times 2011 earnings. The target is US$25 a share within 12 months. IE