Tech stocks off the beaten path

Zach Shafran looks in unconventional places for science and technology stocks, generating steady returns for investors.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Mina Kimes, writer-reporter

Zach Shafran, manager of Ivy Science & Technology, looks for companies that reinvent themselves and their industries.
Where will the Dow end up in 2010?
  • Up 0% to 10%
  • Up more than 10%
  • Down 0% to 10%
  • Down more than 10%
301 Moved Permanently

301 Moved Permanently


NEW YORK (Fortune) -- If you only look at its performance so far this year, Ivy Science & Technology, which has $1 billion in assets, doesn't look terribly impressive.

Other technology funds have soared, topping all Morningstar categories and returning an average of 52% so far this year; Ivy Science & Tech (WSTAX), on the other hand, has risen just 32%, which places it in the bottom 3% of its category.

The fund's long-term performance, however, tells a different story: Over the last three years, it has returned about 6%, beating the S&P 500 by 11 points and landing in the top 1% of all technology funds. Ivy Science & Tech has returned 9% over the last five years, while the index has been flat.

Technology funds are often high-risk investments, but Ivy Science & Tech, which is managed by Zach Shafran, is a steady performer with relatively stable returns.

True, the fund has lagged in the rebound, but it beat its peers by 18 points last year, and 17 points in 2002 after the tech bubble burst. That's because Shafran's portfolio is much more diversified than most technology funds, with large holdings in health care, consumer staples, and industrial stocks, as well as cash.

"We're looking for companies that are utilizing science and technology to dramatically change what they do," says Shafran.

The guiding theme behind the fund isn't Internet services or software but innovation -- companies that reinvent themselves and their industries. That approach has led Shafran out of the traditional technology sector and into stocks like agribusiness giant Archer Daniels Midland (ADM, Fortune 500), which he sees as an alternative energy play. "From a sustainability standpoint, we're interested in what they're doing with biomaterials," he says.

Shafran also invests in drug companies that he views as technological innovators. Those include Vertex Pharmaceuticals (VRTX), which has a late-stage hepatitis drug, and Amgen (AMGN, Fortune 500), a biotech that is awaiting approval from the FDA for an osteoporosis treatment. "Amgen has been around a long time, but it's growing and it's poised to do better," says Shafran.

While many technology investors are focused only on growth, Shafran picks stocks with an eye for valuation -- the average holding in his portfolio has a price to earnings ratio of 15, which is slightly cheaper than the S&P 500. "We look for where there's an opportunity for a change in perception," he says.

As an example, Shafran points to Alliance Data Systems (ADS), which makes private label credit cards. "People look at that and say it's a bad business, not a technology business," he says. "That's the wrong way to think about it -- the company is about data." Alliance Data Systems handles loyalty programs for its clients, collecting and analyzing consumer information -- a service that Shafran thinks more companies will use going forward.

Shafran likes companies that provide technology to non-tech sectors, which is why Aspen Technology, which sells software for process manufacturing to the chemical and petroleum industries, is one of his top holdings.

Aspen is a turnaround bet: "If you think about all of the things that could go wrong, it's happened to them," says Shafran. "Management cooking the books, fraud, no operation controls. But they've got new management and they've turned the ship around." The stock was dropped from NASDAQ, because it failed to meet the exchange's transparency standards, and is now traded on the Pink Sheets.

Ivy Science & Tech's wide mandate has enabled Shafran to pick up shares of lesser known stocks like Telvent (TLVT), a Spanish maker of real-time operating software for industrial businesses and utilities. "Their software controls 50% of all of the hydrocarbon movement in this country," he says. "They're infusing an enormous amount of technology into the global infrastructure."

While Telvent's products are pervasive, says Shafran, its stock has yet to gain the attention of the common investor. "Most people have never heard of them, which we like," he says. To top of page

Company Price Change % Change
Bank of America Corp... 16.09 0.08 0.50%
Apple Inc 102.50 0.25 0.24%
Intel Corp 34.92 0.27 0.78%
Facebook Inc 74.82 0.96 1.31%
General Electric Co 25.98 -0.03 -0.12%
Data as of 4:04pm ET
Index Last Change % Change
Dow 17,098.45 18.88 0.11%
Nasdaq 4,580.27 22.57 0.50%
S&P 500 2,003.37 6.63 0.33%
Treasuries 2.34 0.01 0.39%
Data as of 6:58pm ET
More Galleries
8 must-have travel apps Whether you've got wanderlust or an airline grievance, here are some apps to pack onto your phone. More
Hot stocks: 10 record breaking companies The S&P 500 is trading at all-time highs, and many well-known businesses are leading the charge. Time to buy or sell? More
My biggest retirement mistake Five CNNMoney readers share stories about saving that you can learn from. What they would do differently if they had another chance. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes 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. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.