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Ten tech musts to keep
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August 23, 2000: 9:16 a.m. ET
Tech experts give tips for handling the toughest sector and tap 10 stocks
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Last year, investing in technology stocks was like printing money. Yeah, people talked about stock-market balloons, tulip bulbs and the South Sea bubble. But who has time to listen when there's money to be made?
Then portfolios were decimated in the April Nasdaq crash. The Morgan Stanley Internet index has had a heart-stopping start to the new millennium, dropping 42 percent from Jan. 1 through the middle of August.
If for some reason you had all your wealth in Internet stocks, you just lost close to half your life savings in a few months. Internet billionaires became, well, less wealthy Internet billionaires. Some of them were reduced to mere millionaires -- virtually ruined, literally.
This year's stars are a surprise
It's a lot less funny if it's a large portion of your retirement 401(k), or the brokerage account you're tapping for a down payment.
 Not all technologies are created equal, of course. Internet stocks have taken a particularly bad spanking in 2000. Semiconductor makers have done very well.
But overall, you would have made almost no money holding the S&P 500 technology sector in 2000. It's up a paltry 1.5 percent through Aug. 15.
Highly untech segments like gas companies, utilities and real-estate investment trusts have been the headline acts, all returning more than 20 percent.
"Who thought REITs or utilities would be this year's star performers?" asked Greg Zandlo, president of North East Asset Management and a financial planner. Click here for his take on how much tech investors should hold. "People expect so much with no downside risk. And it's just not there."
Change is good, but it can be very bad
Still, most people don't talk about their gas stocks, or utility holdings, or REITs at cocktail parties. You likely wouldn't want to talk to them if they did. But a fool with a hot tech tip draws a crowd.
More than any other sector, tech promises rapid reward. With that comes risk, something many investors didn't appreciate last year.
"The fact is, the technology universe has always been a fabulous source of wealth creation - and wealth destruction," said Arnold Berman, technology stock strategist for Wit SoundView.
It's creative destruction in action. "There's no place where the survival of the fittest seems to matter more," Berman said.
Dangerous waters to trawl
So are you quick or dead? How do you play the sector without getting killed?
Tech stocks are dear because they hold the best prospects for growth. But adjust those assumptions, and tech stocks correct mercilessly. A small change in interest rates or the company's growth rate has great implications for the price.
It's also hard to know for sure exactly what you should be paying for a stock that derives its value from events that haven't happened. But Berman still believes there's room in tech for many types of investor, even value investors.
"It's possible for them to make money," he said. "Value investors need to know much more." They have to identify second-tier companies that haven't caught the full attention of Wall Street or top-flight companies temporarily out of favor.
Look for leaders with a durable edge
Problem is, most second-tier companies never makes the top flight, and the top-flight company might never come back. So value investors need to stay on top of any signs those are not panning out.
Professional tech investors say the best bets for nonprofessionals are established leaders. You're looking for a "durable competitive advantage," according to Berman, a reason the company will remain a leader.
Those investments aren't cheap. "If you're going to be long-term, it actually requires you to think less about valuation," Berman said.
Tech prices, particularly for new companies, are the subject of much debate. But for long-term investors, it's most important that the leaders you buy maintain their dominance, margins and growth rate, tech experts say.
Ten stocks to hold for the long haul
Here are 10 tech stocks that pundits say have the durability to remain mainstays of the tech part of your portfolio.
1. JDS Uniphase (JDSU: Research, Estimates) is one of the first many pick as  a long-term tech stock. It's "becoming the Intel of the '90s and 2000s in their area," namely fiber-optic components, according to Brian Finnerty, head of Nasdaq trading for C.E. Unterberg Towbin.
JDSU benefits from the build-out of telecom infrastructure, selling more of its fiber-optic parts and lasers as demand for networks to carry large volumes of data increases.
Finnerty says companies that benefit from the telecommunications transformation by selling infrastructure for it are the way to go. JDSU's pending buyout of SDL Inc. (SDLI: Research, Estimates) should strengthen that dominance.
A dominant position
Finnerty believes 2. Nortel Networks (NT: Research, Estimates) also stands to benefit from the growth in fiber-optic communications. It claims as much as 75 percent of American Internet traffic runs through its equipment.
Brian Hayward, portfolio manager at the Invesco Telecommunications fund (ISWCX), an aggressive telecom fund, agrees it is a stock to hang on to. Nortel has gotten into making digital-switching equipment, Internet routers, digital-coaxial-cable equipment and optical-networking components.
Like JDSU, it can count on growth as networks build out. Hayward said it has also stayed ahead of its main rival, Lucent Technologies (LU: Research, Estimates), in anticipating demand for faster networks. "Lucent didn't have the products ready when the demand really ramped," he said.
Investing where the tech revolution revolves
Both Finnerty and Hayward recommend 3. Corning (GLW: Research, Estimates), the leader in fiber-optic fibers and cable. They like its dominance making the underpinnings of the tech revolution. Corning is also trying to expand to compete with optics-components makers like JDS Uniphase.
In the same vein of buying makers of what makes technology work, Finnerty believes investors should hold 4. PMC-Sierra (PMCS: Research, Estimates). The semiconductor maker's specialty chips help move more information, faster, Finnerty explains. "You want to be [investing] where it's being built around," he said.
Due to operational difficulties, the price of a smaller but similar play, Kopin (KOPN: Research, Estimates), has dropped 40 percent off its February high. "But if you're talking long-term this is where you want to be," he said.
Though Internet and e-commerce companies have fallen out of favor and infrastructure companies are the rage, Berman believes No. 5 BEA Systems (BEAS: Research, Estimates) could be a 10-year story. The software maker is one of the highest-flying stocks of the past 12 months.
It makes "software that helps you make software," he explains. By linking databases with e-commerce transactions, its software stands to gain whatever happens in e-commerce, Berman believes, much like companies that make physical infrastructure products.
Don't forget the old fogies
If you've been investing in technology, chances are you have owned or do own 6. Microsoft (MSFT: Research, Estimates) and 7. Intel (INTC: Research, Estimates).
They get obscured when the hottest techs gain more than 1,000 percent a year. But that's why Chris Grisanti, a principal at Spears, Grisanti & Brown, points to tech's "old fogies."
Investors after the up and comers often ask him what will be the next Microsoft. "Microsoft could very well be the next Microsoft," Grisanti says.
There's a lot of uncertainty over the Department of Justice case. But at 35 times earnings, it's selling at less than a third the valuation of its peers.
"It's a fairly rare opportunity. It's only once in every 10 years that Microsoft gets this cheap," Grisanti said. "I just think you've got a great company selling at a third of the price."
Chipmaker Intel (INTC: Research, Estimates), which powers 80 percent of the world's personal computers, isn't cheap. "But I wouldn't bet against these guys, they've shown again and again the ability to innovate," Grisanti said.
'How much do you pay?' is the eternal question
Deb Koch, co-manager of the Kemper Technology fund (KTCAX), agrees individual investors should hone in on those big names, if they're looking to buy and hold.
The Kemper tech fund lagged its high-flying peers when techs ran wild - though it still produced a 114 return for 1999. But it has been steady and less volatile than most tech funds. Microsoft is the No. 4 holding in the fund, according to fund-tracker Morningstar.
Besides that, Koch also thinks 8. Oracle (ORCL: Research, Estimates), the fund's No. 1 holding, is a "must-have." Stocks like Oracle, the largest seller of database products in the world, "hopefully can be a core holding for quite some time," she said.
She also likes 9. Cisco Systems (CSCO: Research, Estimates), perhaps the first name to enter tech investors' minds. Koch still believes the dominant force in routers and switches is a core holding for anyone in for the long haul. Others like Grisanti feel Cisco is too high priced and worry it will not be able to maintain its stellar growth.
A landscape littered with hot stocks that cooled off
Koch rounds out her list with mainstays such as 10. Texas Instruments (TXN: Research, Estimates). The chipmaker's products have a broad range of applications - including processing digital information for cell phones, camcorders and modems.
TI is in the top-three holdings of three of the five best-performing tech funds this year. It accounts for 3.1 percent of No. 1 tech fund, PIMCO Global Innovation (PAIVX), where it is the third-largest holding; 9.0 percent of No. 3 Rydex Electronics fund (RYSIX), the second-largest holding; and 5.8 percent of No. 5 Fidelity Select Electronics fund (FSELX), the top holding. The numbers are per fund tracker Morningstar.
Funds may be the way for circumspect investors to go. Most of the 10 "must-have" stocks are conservative plays, but even they show surprising volatility. For instance, cell-phone maker Nokia (NOK: Research, Estimates) lost a third of its value in just over two weeks in mid-July.
The vital question? "Is that competitive advantage being eroded?"
"The issue with technology is, it's -- by definition -- change," Marshall Acuff, equity strategist for Salomon Smith Barney said. You have to monitor technology more than other holdings. "You can't just go to sleep and say I'm going to forget it for 20 years," Acuff said. 
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