The latest signs of weakness in the technology sector came recently when disappointing earnings from IBM and Apple Computer triggered a sharp decline in their stock prices. Other technology stocks have suffered similar sell-offs.
"The severe contraction in valuations has caused investors to retreat from the sector and Wall Street analysts to back away from their recommendations," Charles Morris, portfolio manager of the $177 million T. Rowe Price Science & Technology Fund, wrote to shareholders in the fund's semiannual report.
Mr. Morris says he is focusing on companies with the strongest short-term earnings outlooks. "You want to be in the technology stocks that will bounce back the hardest in the recovery," the 29-year-old money manager said.
The strategy has benefited fund shareholders in the past. Science & Technology generated a total return of 17.65 percent for the 12 months that ended June 30, according to Lipper Analytical Services Inc., the a New York mutual-fund rating service. For three years ended June 30, the fund's total return was 69.81 percent.
In selecting stocks, Mr. Morris looks for companies with expanding sales, new products and strong balance sheets.
"Given the current hostile environment for science and technology stocks, we have emphasized companies we believe possess sound, near-term earnings prospects," Mr. Morris wrote.
"Our intent is to avoid the torpedoes while positioning the portfolio to participate fully in the sector's eventual recovery."
Mr. Morris says the technology industry is under pressure from weakening foreign demand and intensifying price competition.
Changes in distribution channels, he said, are cutting profit margins for some segments of the electronics industry, especially personal computer hardware and software producers.
Health-care and biotechnology companies are facing tighter federal regulations, Mr. Morris said. "These pressures have resulted in more than the usual number of science and technology companies reporting earnings shortfalls," Mr. Morris TC said. "Investors have reacted swiftly and mercilessly to these reports, slashing the market capitalizations of the perceived underachievers by 35 percent to 60 percent."
"Morris is currently weathering the first significant market correction since he became manager last August," writes Jennifer Newport, an analyst with Morningstar Inc., a mutual-fund rating service in Chicago.
Mr. Morris took the reins of the fund in September, when his predecessor, Roger McNamee, left the firm. Morris has helped manage the fund almost since its inception in 1987, a spokesman for T. Rowe Price said.
Mr. Morris is coping with the technology sector's lackluster performance by increasing his exposure to providers of data services, which benefit from new technology instead of creating it.
One such holding is Columbia, S.C.-based Policy Management Systems, which provides software and computer systems to the insurance industry. Mr. Morris has also increased his investment in companies that link computers, which the industry calls networking.
One of the fund's largest holdings, with a $7.2 million stake, is Novell, based in San Jose, Calif.
Novell makes networking software, systems and related products. Novell's products can allow several personal computers to share a laser printer, for instance.
Cisco Systems, based in Menlo Park, Calif., is another company in the fund that makes networking equipment. The fund holds a $7 million stake in Cisco.
Despite investors' lack of enthusiasm for technology stocks, Mr. Morris says he's cautiously optimistic on the sector's outlook -- .. barring a drop in the broad stock market.
T. Rowe Price Science & Technology Fund
Charles Morris, 29, is a vice president at T. Rowe Price Associates. Bachelor's degree in finance from Indiana University, Bloomington. MBA, Stanford University Graduate School of Business
ABOUT THE FUND
Total assets $177 million.
# 1-year total return
(as of June 30) 17.65%
# 3-year total return
(as of June 30) 69.81%
Minimum investment $2,500.
Sales charge none.
Large holdings: BMC Software, Adaptec, Cisco Systems, Medtronic and Novell.
100 E. Pratt St. Baltimore, Md. 21202 (800) 638-5660.