Byline: Kathleen Gallagher
Sep. 18--At the end of 2003, Robert J. Costomiris held no technology stocks in the mutual fund he manages.
Now he's got a bigger percentage of tech names than the Russell Mid Cap Value Index, the index he measures his fund's performance against.
"We're looking to tech for cyclical exposure, and underweighting consumer discretionary, energy, financials and industrials," said Costomiris, manager of the Wells Fargo Advantage Mid Cap Disciplined Fund.
Costomiris' fund snubbed the majority of tech stocks during the last three years because of concerns about investor euphoria pushing their valuations too high, he said.
He also was worried that most technology companies' earnings per share would be hurt by proposed legislation that would require them to expense the value of options they award to employees. Tech companies historically have used options more aggressively than other industries to reward their workers.
Congress passed legislation in 2004 requiring companies to expense the options of their top five executives. It hurt tech companies initially, but now its impact is discounted in the prices of many of their stocks, Costomiris said.
There is concern now that some companies have been manipulating option grants by backdating them to when the company's stock was at or near a low point, so the awards would be worth more. That has dented the share prices of many tech stocks, in some cases unfairly, Costomiris said.
It has also helped lower investor expectations for the group -- and lower expectations are one of the three factors he says he's always looking for.
Costomiris also wants to minimize balance sheet risk and price risk.
Tech companies are flush with cash, which is evidenced by the large number that are either buying back their stock, raising their dividends, or both, he said.
There isn't much price risk involved, either, given that they've underperformed the overall market for the last three years, Costomiris said.
Two tech companies Costomiris owns in his fund are good examples of those for which balance sheet, price and expectation risks are under control, he said.
Juniper Networks Inc. (JNPR, $15.32), Sunnyvale, Calif., provides equipment for Internet and telecommunications service providers and is the second-biggest maker of routers behind Cisco Systems Inc.
Routers are a growth industry, and the biggest driver is the media convergence that is leading to Internet TV, Costomiris said. Juniper is solidly positioned against Cisco to at least maintain a share of this fast-growing market that has high margins and high recurring revenue, he said.
Juniper's shares have declined from a high of $24.60 in November, and the company is conducting an investigation into whether there were backdating issues with some of its options.
"We believe there will be some financial statement effect to the option timing issue at Juniper. However, we believe that's been baked into the stock," Costomiris said.
Applied Materials Inc. (AMAT, $17.20), Santa Clara, Calif., makes semiconductor wafer fabrication equipment and related parts for the semiconductor industry.
Applied Materials paid a dividend for the first time in 2005 and raised it to 5 cents a share this year from 3 cents. The company, a leader among semiconductor equipment makers, also announced earlier this year it would buy back 20% of its stock, Costomiris said.
Applied Materials' flat panel business, which produces equipment for making everything from the panels for TVs to solar panels, is one of the company's fastest-growing. That business represents about 20% of its revenue.
"The bottom line is that, being a leader, they're obviously hugely diverse -- in terms of a diverse product line, in terms of a diverse client base and in terms of a tremendously diverse geographic footprint," Costomiris said.
The biggest risk he associates with the stock is the possibility the economy will stumble and demand for products that use the company's equipment will falter, he said.
"But we think at the end of the day that's mitigated by these other positive attributes and the fact that their geographic diversity mitigates to some extent the cyclical exposure," Costomiris said.
He began buying Applied Materials for his fund in June and now has full positions. Costomiris says both Applied Materials and Juniper should be able to perform at least as well as the overall market over the next few years.
Copyright (c) 2006, Milwaukee Journal Sentinel
Distributed by McClatchy-Tribune Business
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TICKER SYMBOL(S): NASDAQ-NMS:JNPR, NASDAQ-NMS:CSCO, NASDAQ-NMS:AMAT
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