Tech stocks sink as investors' worries of slowdown grow - USATODAY.com

Nasdaq composite index this month

By Matt Krantz, USA TODAY

Technology stocks are landing somewhere they haven't been in some time: on the sell list.

Serious second-guessing of rosy predictions for the economy and tech stocks in 2010 has turned one of the hottest sectors earlier this year into one of the worst.

While much was made about how bad August was for the broad market, things were particularly harsh for technology stocks. The tech sector of the Standard & Poor's 500 is down 11.5% this year, making it the worst of the 10 sectors. The tech-heavy Nasdaq composite is off 6.8% for 2010, lagging behind the 4.0% and 5.9% declines by the Dow Jones industrial average and S&P 500, respectively.

BAD MONTH: Stocks have worst August since 2001

Tech stocks are a big reason for what was an August that investors would rather forget. The S&P 500 fell 4.7% for the month, making it the worst August since 2001, says S&P. Roughly $700 billion in paper wealth was erased during the month, according to the broad Wilshire 5000 index.

"Investors are taking tech down a notch as these companies are affected the most in a slowdown," says Michael Sadoff at Sadoff Investment Management.

At the start of the year, investors focused on tech's bright spots, including exposure to foreign markets and revenue growth. Now, though, investors are concentrating on the sector's weaknesses, including:

•Heavy dependence on a healthy economy. Investors who had bet the economy was improving and figured companies would upgrade their computers en masse this year have been disappointed, says Keith Goddard, manager of the Capital Advisors Growth fund.

Cautious guidance from several leading tech firms shows investors that companies are in no hurry to upgrade, he says. "Tech is a cyclical industry, although it didn't used to be thought of that way," Goddard says.

•Lack of traits investors seek during uncertain times. Investors overlook tech's relatively low dividend yield and costly stock-option plans for employees during bull markets, says Albert Meyer of the Mirzam Capital Appreciation fund. However, dividends and dilution from stock options become important when investors get defensive — as they are now.

"These are hurdles for long-term investors regarding the tech industry," Meyer says.

•Upheaval in the tech industry. Seeing the rise of new computing devices, such as tablet computers, investors are re-evaluating the traditional ways they view tech stocks and are pulling back, says Kevin Landis, manager of the Firsthand Technology Value fund.

"Sometimes, product cycles really do matter, and this is one of those times," he says.