Tech stocks for an economic slowdown
With the economy sharply slowing, the tech sector faces tough times ahead. But investors can still win.
By Grace Wong, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- The economy is coming in for its landing, but that doesn't mean the tech party's over.

Technology stocks are fresh off a stellar third quarter - tech was the third-best performing sector during the period, gaining a robust 8.2 percent. (See chart)

markets_3q_sector.gif
Stocks for a slowdown
Company Ticker 1-year return
Automatic Data Processing ADP 11%
AVX AVX 38.7%
CSG Systems CSGS 22.8%
Fiserv FISV 3.5%
Global Payments GPN 8.5%
UTStarcom UTSI 7.3%
Source:Baseline

The rally helped lift the Nasdaq 3.8 percent during the third quarter and pulled it back into positive territory for the year.

But while stocks have been rebounding, the economy has been skidding. Some economists are even voicing concerns about a recession. (Full story)

Bad economic times usually spell trouble for tech companies. "Tech is cyclical. It's going to react to the business cycle and that's going to slow down," said Michael Pento, senior market strategist at Delta Global Advisors.

While the tech sector overall may suffer during times of economic contraction, investors can limit their exposure to the worst of the economic fallout.

Turn defensive. Classic defensive plays are one way to go. Scott Kessler, who heads up the information technology research group at Standard & Poor's Equity Research, recommends looking for companies that have a steady stream of recurring revenue and more longer-term contracts in place.

He likes payroll processing firm ADP (Charts), a large-cap, high-quality name that can withstand convulsions in the economy. ADP has a market capitalization of about $26 billion.

Kessler also likes data processing firms like Fiserv (Charts) and Global Payments (Charts), which are smaller but still strong in their fundamentals.

Don't overlook the small. In general, bigger firms tend to endure economic downturns better than their smaller-sized counterparts, but there's still value to be mined in smaller-cap stocks with stable earnings, according to Paul Davis, portfolio manager of the Schwab Technology Fund (Charts).

His fund doesn't own many of the big retail tech names like Google (Charts) and Microsoft (Charts), but holds a number of small-cap stocks. "We don't hold a lot of household names because we're seeing better value elsewhere," he said.

Davis owns both CSG Systems (Charts), which manages the customer care needs for cable and satellite providers, and telecommunications infrastructure maker UTStarcom (Charts) in his fund. CSG Systems has returned nearly 23 percent in the last year while UTStarcom has gained about 7 percent in the same period. Both firms have a market cap of about $1 billion.

Diversification is key. Davis said he also keeps an eye on firms that have a diverse revenue stream - both in terms of geography and sector - since they tend to be safer.

His fund holds a position in AVX Corp. (Charts), which makes electronic components. From autos, telecoms and hardware to defense, aerospace and consumer electronics - AVX sells its products to a variety of sectors. Plus, about 70 percent of its sales come from overseas.

Stay away from cyclicals. Besides looking for diversified firms, it's also a good idea to steer clear of those focused solely on a single industry.

Standard & Poor's has a mixed view on semiconductors and several "sell" ratings on semiconductor equipment makers, including KLA-Tencor (Charts), Kessler said.

"With the economy slowing, there isn't likely to be a big decline in purchases of items with chips in them," he said. "But there's not going to be a big boom in demand for the next year or two either."


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.