Tech stocks for an economic slowdown
With the economy sharply slowing, the tech sector faces tough times ahead. But investors can still win.
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)
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.
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.
"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."