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Less Tech in Your Portfolio's Diet

By Thomas Smith Amid a steady drumbeat of bearish news from industry leaders -- including Intel (INTC), which lowered revenue guidance at its June 6 mid-quarter earnings update -- S&P on June 7 lowered its recommended weighting on the technology sector to underweight from market-weight. This means investors should hold a lower percentage of tech in their portfolios than the sector's weighting in the S&P 500-stock index.

A number of major tech players -- including Intel, Flextronics (FLEX), Nortel (NT), and IBM (IBM) -- have reported softer revenue outlooks or renewed cost cuts in recent weeks. We at S&P believe this wave of bad tidings is likely to lead to underperformance for the tech group in the near term.

VULNERABLE VALUATIONS. For the longer term, we think industry fundamentals should improve along with with the recovery in the U.S. economy and with expected tech equipment upgrade cycles in 2003-04. But valuations in many segments of the industry remain high and may be vulnerable should the recovery be stretched out.

What do we like in the tech group right now? We favor companies with diverse, consumer-oriented markets, namely power semiconductor producer International Rectifier (IRF), financial software publisher Intuit (INTU), and video-game software maker Electronic Arts (ERTS), each of which carries S&P's highest investment ranking of 5 STARS (buy). Smith is a technology industry analyst for Standard & Poor's

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