Back in 1999, money managers trumpeted technology stocks, arguing that soon there would be microchips in everything from credit cards to Toyota accelerators, and they were right. Unfortunately, they were also about 10 years too early. But today, tech companies are booming, despite a lousy economy and falling prices. It’s not a bad time to take another look at the tech sector, provided you have an exit plan in place.
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Technology is a broad sector, and where you decide to invest in tech depends, to some extent, on your outlook for the economy as a whole. If you’re an optimist, and you feel that the world economy is going to grow more rapidly than expected, then you should consider investing in companies that make semiconductors — the brains of modern computers — or even in semiconductor equipment makers, which make the machines that make computer chips.
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Semiconductor companies tend to be depressingly cyclical: They soar as the economy picks up, but eventually overproduce, leaving them with a pile of unwanted chips as the economy hits its downturn.
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So far this year, the cycle has been up: Many semiconductor companies, such as Intel, have seen record earnings as the economy has recovered from the worst of the recession. Driving the semis: Strong demand for consumer electronics, particularly smartphones. A lot of these technology purchases, such as new computers and phones, have become necessities, says Ryan Jacob, manager of the Jacob Internet fund.
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Businesses, too, have started to replace their aging technologies with new machines. There gets a point where you can only push off the upgrades for so long, Jacob says. They’re really necessary purchases at this point.
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Strong demand, even in a sluggish economy, augurs well for chipmakers. What Jacob finds particularly compelling about semiconductor companies now is that they are getting higher profit margins,…