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Once near death, tech stocks breathe new life for investors

Money manager sees growing stability in a sector that has matured since its stock market meltdown, ROB CARRICK writes

Back in the spring of 2000, Noah Blackstein's infatuation with technology stocks would have marked him as yet another copycat money manager trying for an easy score.

In today's market, where commodity stocks are king and technology is remembered for its Chernobyl-like meltdown, Mr. Blackstein's preference for tech makes him a shrewd contrarian.

His fund, Dynamic Power American Growth, is the best-performing U.S. equity fund over the past year. Holdings in stocks like Apple Computer, Broadcom and Google have helped generate a 35.4-per-cent gain in the 12 months to March 31, compared with 9.3 per cent for the average U.S. equity fund and 7.8 per cent for the S&P 500 stock index (in Canadian dollars). The fund's total weighting in technology: 44.7 per cent. The fund's energy, gold and metals holdings: nil for now and the immediate future.

"There are so many people who are better at commodities than me," Mr. Blackstein said. "You not only have to get the stock right, but you also have to make a call on the underlying commodity. I don't know whether oil should be at $75 or $50 [U.S.]."

Mr. Blackstein is being a bit modest here. Making money in energy, gold and metals stocks today is as easy as picking up money off the sidewalk. This explains why the people running mutual funds in a wide variety of categories have flocked to commodity stocks in a way that recalls their exposure to technology six or seven years ago.

Funds with lots of oil, gold and metals stocks have in some cases made extravagantly good returns of 20 to 30 per cent annually in the past three years. But there's growing concern that unsuspecting investors are going to suffer if bust follows boom in the commodity sector.

"I think individual investors should be very concerned about this," said Rudy Luukko, investment funds editor for the independent analysis firm Morningstar Canada. "Historically, resources are among the most volatile companies in the stock market, and this can be shown by looking at some of the devastating losses that have occurred in the past when commodity booms turned into busts."

No one says tech stocks are a safe haven in this commodity-obsessed market. But two facts can't be ignored. One, tech stocks are safer than commodities stocks because they haven't risen as much and, two, there is money to be made in tech.

Mr. Blackstein knows tech well because he was there from the beginning. After moving over to Dynamic Funds from BPI Financial, he took over Power American Growth in July, 1998, as a hotshot 28-year-old. Back then, the tech sector was gathering itself for a rise that created one of the most astounding and disastrous speculative investing bubbles in history.

There were tech stocks in his fund back then, but not a lot because he was leery of investing in firms that didn't have any earnings. "I have more tech in my fund today than I did in 1999," he said.

Mr. Blackstein is a growth investor, which means seeking companies that stand out for the way they increase their revenues and profits. Back in 2004, he began to get excited about Apple and Google. Apple was benefiting from the introduction of the iPod music player, while Google had just gone public amid huge excitement over its industry-leading tools for searching the Internet and other tasks.

"Most of my tech holdings have been in these two companies," he said. "Since the technology sector hit bottom, they have been the new leadership."

Both stocks also fit into one of the themes that Mr. Blackstein believes will drive the tech sector in the future, which is the ability of Internet companies to allow people to customize their own music, information or other content, and then supplying these customers with targeted advertising. "From Google's perspective, they're the ones serving up those ads," Mr. Blackstein said. "From Apple's perspective, they're the ones who are enabling the distribution of content.

"There's a big change going on in the media business," he added. "The technology companies at the forefront of it have been profitable, and that's a longer-term trend that I don't see changing any time soon."

Mr. Blackstein also sees promise in the companies that build equipment for the networks that allow people to fill up their iPods with music from Apple's iTunes website or to connect with Google's on-line tools. That's why he holds such networking names as Broadcom Corp. and F5 Networks. This latter company calls to mind a more notorious name, Nortel Networks, which Mr. Blackstein says he may have owned fleetingly back in the tech boom, but not in any great quantity.

Mr. Blackstein's enthusiasm for tech sounds a lot like the prevailing investing wisdom of 2000, when the Nasdaq Stock Market, a barometer of tech stock performance, peaked at a level that is more than double where it stands now. He counters by saying the tech sector has been strengthened by its near annihilation.

"It's sort of like the automobile industry in the 1920s, where you had hundreds of companies," he said. "You had a major shakeout and a collapse of the industry, and then a re-emergence of the real powerhouses of the automobile industry in the 1940s and 1950s."

As chief institutional strategist for RBC Dominion Securities Inc., it's Myles Zyblock's job to highlight the stock market sectors that look promising and warn investors away from those that could lose them money. Right now, Mr. Zyblock is much less positive about Canada than he is about the U.S. market, especially in sectors like telecommunications, pharmaceuticals and, yes, technology.

He said he was talking this week with some clients who wondered whether it would be a good idea, assuming the economy stays strong, to move some money out of the resources sector and into tech.

"I think that's absolutely a reasonable thing to do, given where we are today," Mr. Zyblock said. "With all the people piling into materials and energy stocks globally, tech is sort of a forgotten sector. These are mature companies, and they're very healthy."

Concern about the commodity-driven Canadian stock market arises because energy, gold and metals stocks account for 45 per cent of the S&P/TSX composite index. This is reminiscent of the tech boom's zenith, when Nortel Networks alone accounted for an amazing 34.6 per cent of the index. Given this parallel, it's not surprising that there has been a lot of attention paid to the question of whether the commodity boom is on its way to becoming a sequel to the tech disaster.

The past week's strategy note written by Mr. Zyblock and his team was headlined: "Speculative Excess is Rearing Its Head," and it offered up some strong evidence that the stock market risk is growing. Commodities figure prominently in the analysis. Specifically, Mr. Zyblock noted that oil and copper prices have been rising despite economic factors that would suggest an easing. He also cited an increased appetite for risk on the part of individuals, notably through increased trading of speculative stocks on the TSX Venture Exchange and the use of margin, or borrowed money, to invest.

Tech, itself, has been hot lately, although nothing compared to commodities. The Nasdaq has gained a cumulative 60 per cent or so over the past three years, while the resource-heavy TSX is up 86 per cent. If you look at the Nasdaq on a longer-term basis, though, you'll see the ferocious volatility that characterizes the sector. Fact is, the Nasdaq is up only 13 per cent in total over the past five years.

Individual technology stocks can be treacherous, and you don't need to go back to the meltdown that started in 2000 for examples. Intel, an aristocrat from tech's earliest days, is down close to 20 per cent already this year. Microsoft, also tech royalty, had an especially bad day yesterday, falling as much as 13 per cent after issuing quarterly results and a forecast for future earnings and revenue that disappointed analysts.

While tech has generally been strong lately, it has attracted far less interest from mutual fund managers than resource stocks. "That's the great thing about the sector," Mr. Blackstein said. "People aren't following it right now, and when they do follow it, they go back to names that they owned six or seven years ago."

This is key -- if you invest in tech right now, you can't look back to what worked the last time. That's why Mr. Blackstein says he's not a big believer in the personal computer any more, even if Apple does operate in this area. Rather, the big themes are the Internet and wireless, which means the trend to connect phones, computers and the Internet without wires.

Potential aside, the old question about tech persists: Can money be made by companies in the sector, and by investors?

Google's experience generating revenue from advertising suggests the answer is an emphatic yes. "Google is an exceptionally profitable company," Mr. Blackstein said. "We talk about Google as a tech stock and certainly they're tech-focused, but they're an advertising company. Ninety-nine per cent of their revenues come from advertising."

There are some subtle trends that further suggest that there's more money to be wrung from technology stocks. Mr. Blackstein cited a recent Wall Street Journal story about how unused fibre-optic capacity is becoming more and more scarce. It seems the glut of capacity that grew out of the Internet craze six or seven years ago is being used up, which in turn means the prices for shuttling data along electronic networks is starting stabilize after years of declines.

"Everything that was talked about years ago in terms of Internet demand, content and the need for all that fibre -- it was actually all correct. Now, anyone who was in those stocks is probably bankrupt," he joked. "But the reality is that all these networks are running at full load."

Mr. Blackstein describes himself as the kind of stock picker who cares more about a company's growth potential than the sector it's in. For now, he's having no trouble finding what he needs in tech.

"There are themes going on in technology that are very powerful," Mr. Blackstein said. The commodities people say the same thing, but they can only be right for so long.

***

Technically hot

These five funds have posted big returns in the past year with a major portion of their portfolios in technology stocks

AGF Aggressive Growth

- One year return: 23.9%

- Holdings in tech stocks: 26.7%

- Skinny: In the rebound after a thrashing in the tech meltdown

MONTHLY CLOSE, ADJUSTED NET ASSET VALUE

April 27 close, $19.50

Fidelity Global Opportunities

- One-year return: 19.2%

- Holdings in tech stocks: 24%

- Skinny: Even a big, conservative fund firm can learn to love tech

MONTHLY CLOSE, ADJUSTED NET ASSET VALUE

April 27 close, $9.62

Mavrix Enterprise

- One-year return: 33.9%

- Holdings in tech stocks: 46.4%

- Skinny: Huge recent returns help ease memory of past woes

MONTHLY CLOSE, ADJUSTED NET ASSET VALUE

April 27 close, $2.51

Dynamic Power American Growth

- One-year return: 35.4%

- Holdings in tech stocks: 44.7%

- Skinny: Lots of technology = best-in-class performance

MONTHLY CLOSE, ADJUSTED NET ASSET VALUE

April 27 close, $6.94

Renaissance Global Opportunities

- One-year return: 23.9%

- Holdings in tech stocks: 22%

- Skinny: Global equity funds with a liking for tech are rare

MONTHLY CLOSE, ADJUSTED NET ASSET VALUE

April 27 close, $24.42

SOURCES: GLOBEINVESTOR.COM

GLOBEFUND.COM

THOMPSON DATASTREAM

*TO MARCH 31, 2006

***

Nasdaq rat pack

These are the five hottest Nasdaq-listed technology stocks of the past 12 months

Hana Biosciences

- One-year return: 706.7%*

- Ticker: HNAB

- Skinny: If you're looking at tech stocks, don't forget biotech

MONTHLY CLOSE, HNAB - NASDAQ

April 28 close, $11.81 U.S.

Anadigics

- One-year return: 525%*

- Ticker: ANAD

- Skinny: Riding the wave in wireless communications

MONTHLY CLOSE, ANAD - NASDAQ

April 28 close, $8.98 U.S.

BTU International

- One-year return: 504.2%*

- Ticker: BUTI

- Skinny: Nuts-and-bolts firm sells circuitboards components

MONTHLY CLOSE, BUTI - NASDAQ

April 28 close, $20.21 U.S.

Viropharma

- One-year return: 489.5%*

- Ticker: VPHM

- Skinny: Looking for drugs to fight diseases like flu and hep C

MONTHLY CLOSE, VPHM - NASDAQ

April 28 close, $11.24U.S.

GigaMedia

- One-year return: 466.4%*

- Ticker: GIGM

- Skinny: Internet access for the Asian market

MONTHLY CLOSE, GIGM - NASDAQ

April 28 close, $8.27 U.S.

SOURCES: GLOBEINVESTOR.COM

GLOBEFUND.COM

THOMPSON DATASTREAM

*TO APRIL 27, 2006

© 2007 The Globe and Mail. All rights reserved.

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