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A Talk with a Tech Stock Bull

The Nasdaq has been under pressure for much of the year, but investors should be looking at beaten-down tech stocks, says Ben Halliburton, founder and chief investment officer of asset-management firm Tradition Capital Management in Summit, N.J. Not all tech companies will do well, but he figures that those tied to business spending will, given the hefty amounts of cash on Corporate America's balance sheets. Halliburton expects to be overweight technology stocks in the next several months, and he thinks consumers have pretty much run out of spending steam.

Tradition has $330 million under management and has outperformed the S&P 500-stock index by 5% each year since its inception four years ago. Halliburton's strategy is to focus on large-cap names, but he'll often add smaller, promising companies or those in turnaround mode. He now owns (both personally and for clients) Amdocs (DOX), Bookham (BKHMV), Brocade (BRCD), Computer Sciences (CSC), First Data (FDC), Interwoven (IWOV), Motorola (MOT), Nokia (NOK), Veritas (VRTS), and Vignette (VIGN).

In a Sept. 10 interview, Halliburton spoke with BusinessWeek Online reporter Amy Tsao about his picks and pans in information technology and his expectations for the sector. Edited excerpts of their conversation follow:

Q: Why do you like the tech sector now?

A: The amount of cash on companies' balance sheet has broken $1 trillion. That means corporations are in great shape to increase spending. We're beginning to see some uptick in employment, so there will be associated capital-expenditure increases along with that. From a macro standpoint, we think tech looks particularly attractive.

Q: What will next year look like for tech stocks?

A: We think tech spending continues to recover. Technology companies as a group should not experience downward earnings revisions in 2005. Next year will be better earnings-wise. And companies that are well-positioned in their sectors should boast increasing revenue and earnings.

Q: What are your biggest holdings?

A: Our biggest positions are in Computer Sciences (CSC) and First Data (FDC). These are relatively less volatile information-technology services companies. Both are reasonably valued today, with modest upside of 20% to 25%. They are long-term core holdings.

Q: You mention Bookham. That's a very small company.

A: We think smaller names have significantly more upside than bigger ones. Bookham is in the optical-component business. They were a U.K.-based company but are redomiciling in the U.S.

The optical-component business has been in a depression as overspending between 1997 and 2000 caused spending to collapse. Currently, it's not making any money, but the valuation on the stock is very attractive. It's trading at 50% of book value. That's a quite a discount when others in the business are still overvalued, namely Nortel (NT) and JDS Uniphase (JDSU).

Q: What about Amdocs?

A: We've owned that one for a couple of years now. It provides billing and customer-management software and related services. They are benefiting from a recovery in spending in telecom. We think 2003 was the bottom and 2004 should be up modestly -- by about 2% to 5%. We're looking at continued recovery in 2005 of 5%. We're looking for earnings per share in the neighborhood of $1.30 next year. The stock currently trades around $21 but can reasonably go to between $27 and $30.

Q: Plenty of analysts have gone cold on the cellular handset companies. What's your view on them?

A: We view the cellular handset business favorably as cell penetration increases across the world. Though hypergrowth is behind the industry, we still think these are companies will grow higher than the rate of global gross domestic product. We see earnings growth of 10% to 12% as doable at handset companies. Motorola (MOT), which is restructuring, could improve margins and grow a little faster than that.

Q: What's your opinion of storage stocks?

A: We own Veritas and Brocade. Veritas is a leading software company for managing storage information. Brocade is one of leaders in the storage-area-network business. Both stocks are down dramatically, in excess of 90%, from 2000 bubble levels. There has been a recovery in spending on these technologies. We think storage will continue to gain spending dollars.

Q: Are you staying away from certain areas in technology?

A: One area we don't have investments in is semiconductors. They've been weak this year, and we think there's still a lot of inventory in the system that will take a while to work through. Earnings estimates for 2005 are coming down pretty sharply for most of these companies, and that makes it not a great time to be a buyer of the stocks.

We also don't own any computer hardware companies like Sun Microsystems (SUNW) or Hewlett-Packard (HPQ). During the boom years, because of Y2K, the industry expanded to meet that demand, even though it turned out to be a blip. We're still seeing significant overcapacity in the business.

Q: You've said consumer spending should weaken in the next year, but are there names tied to the consumer that you still like?

A: In general consumer spending will be relatively weak, and cyclical stocks will be weakest. Whether it's autos, housing, or appliances, they all look pretty extended. We are already seeing softening in a major way in the auto sector. Low rates have kept housing at robust levels, but we see that slackening too.

We do own some consumer staples. We own drugstore chain CVS (CVS). And in the products area we own Hain-Celestial Group (HAIN), Kimberly-Clark (KMB), McCormick (MKC), and Pepsi (PEP). All of these are solid companies, with modest growth rate, good franchises, and good free-cash generation. Hain-Celestial has the most upside. We're expecting 15% earnings growth for the foreseeable future.

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