Time to Love Tech Again?

If six years ago your broker had told you that tech stocks were a safe place to hide out from the gyrations of a shaky financial sector, you probably would have fired the broker. Not these days. Consider all that tech has going for it now.

First, tech companies aren't financial companies. Any company even associated with debt, mortgages and leverage buyouts carries a stench that just won't wash off. But tech outfits, overall, hold plenty of cash, and many are using that money to buy back shares and even raise dividends or start paying them.

Second, there's the magic elixir of globalization. Foreign companies need technology from U.S. companies, which generate more patents than the companies of any other country. Globalization also means the opportunity to sell to the mushrooming consumer classes in countries such as China and India. U.S. companies also produce much of the gear that makes globalization possible to begin with -- the hardware and software that allows communication through wired and wireless networks.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Third, the weakening dollar is fueling tech exports.

Finally, values aren't hard to uncover. This is despite an impressive showing by tech stocks recently. The major indexes that track the tech sector have risen about 20% in the past year through August 31 (for example, the Nasdaq 100 rose 23%), compared with 14% for Standard & Poor's 500-stock index.

Here are five tech blue chips worth considering:

1. Apple Inc. (symbol AAPL). Yes, it's already up 70% for the year and has been on a tear for several years. But Apple remains high on Christopher McHugh's list of tech stocks to buy and hold. McHugh, a co-manager of Turner New Enterprise, has held shares in Jobs & Co. since 2004. Although the stock is pricey -- trading at 33 times estimated earnings of $4.38 per share for the fiscal year that ends in September 2008 -- McHugh sees too many growth opportunities to sell now. Apple shares closed at $144.16 on September 4, but took a hit to close at $136.80 the next day when the company cut the price of its marquee product, the iPhone, by $200, down to $400. No worries. A similar discount in the price of the iPod once caused Apple stock to drop -- until investors realized that cheaper iPods meant more sales and more profits for Apple.

Among the opportunities, McHugh says, are Apple's plans to expand its retail stores overseas; production of cheaper, better versions of the red hot iPhone; and the growing popularity of Apple's personal computers. "The halo effect" for Apple's products and its ability to innovate will continue to generate strong growth, he says.

2. Intel (INTC). The semiconductor business is notoriously cyclical, but the strongest chip makers should prosper thanks to strong global demand. McHugh likes Intel despite problems it's had recently. Now that its management team is refocused and the industry appears to have worked through a chip glut, Intel is in a much better position to grow than rival Advanced Micro Devices (AMD), says McHugh. Intel closed at $26.18 September 4, up 1.7%. It's up 28% year-to-date.

3. Broadcom (BRCM). This smaller, communications chip maker is also a favorite of McHugh's. The reason: He says it should be able to expand its sales in the profitable wireless-phone market, including pushing into profitable areas dominated by rival Qualcomm. Shares of Broadcom rose 2.7% September 4 to $35.44 and are up 10% this year.

4. Cyprus Semiconductor (CY). Kevin Landis, chief investment officer of the Firsthand funds, calls Cyprus the "best bargain" story in tech. The firm owns 53% (a stake worth roughly $3 billion) of SunPower (SPWR), a maker of highly efficient solar panels. In addition, Cyprus has $800 million in cash. Given that Cyprus's shares, which closed at $25.91 September 4 and are up more than 50% year-to-date, are still valued at only $4 billion, you essentially can buy into the promising semiconductor business for nothing, Landis figures.

5. Applied Materials (AMAT). If Landis and McHugh are correct about rising demand for chips, Applied Materials should also reap the benefits. The company makes machines that produce semiconductors. Moreover, Applied, like Cypress, has a solar angle. Using technology that isn't much different from that used in chip-manufacturing equipment, Applied builds machines that make thin-film solar panels. The stock rose 2% on September 4, to $21.78, and is up 18% so far this year.

One note of caution: With the financial sector's problems raising questions about the sustainability of the economic expansion, this is no time to buy the smaller, riskier tech names, many tech fund managers say. But there are some prime tech stocks worth considering in these times of volatility.