IT HAPPENS EVERY AUTUMN. LEAVES CHANGE color and fall to the ground, jack-o'-lanterns ap pear in windows or on front porches and investors start surveying tech shares.
That's because technology stocks generally beat the market over the final three months of the year. In each of the past five years, the Nasdaq Compos ite Index, a tech benchmark, has outpaced the Stan dard & Poor's 500 in the fourth quarter. And over 10 years, the Nasdaq has trailed the broader stock market only three times, in the fourth qmu'ters of 1996, 1997 and 2000 (the latter reflecting the great dot-com implosion), according to data trom Thom son Financial/Baseline.
Tech's fourth-quarter outperformance may stem from the increasing seasonality of the busi ness. Years ago, technology was dominated by cor pOl"ate purchases of computers, and so sales were spaced almost evenly throughout the J'ear. But con sumer pm"chases of PCs and consmner electronics now account for half of semiconductor sales, accord ing to the Semiconductor Industry Association, which makes tech much more dependent on certain periods, such as the U.S. holiday shopping season.
Whatever the reason, there seems to be a solid chance the phenomenon will occur again this year.
Despite concerns about consumers having less money to draw down from a cooling housing mar ket, there should be vibrant competition in elec tronic gadgets to woo their dollars this quarter, such as the battle between Apple Computer's (ticker: AAPL) iPods and Microsoft's (MSFT) new gizmo, Zune.
On the corporate side, there's the ritual known as the fourth-quarter budget flush. IT departments with unspent money must use it or lose it before the year ends.
And tech shares have lagged this year. The in formation-technology sector of the S&P 500 is up just 3.3%, versus 8.4% rise in the total S&P, making it the worst-performing group.
In the past 16 years, the market's worst-performing sector in the first three quarters of the year has produced the best retums in the fourth - a 12.34% rise, on average, ac cording to research firm Birinyi Associates.
"Technology, which is this year's worst performer thus far, should continue higher for the remainder of the year," writes Biri nyi analyst Justin Walters in a recent note.
But where to look amid all the potential _ tech picks is a puzzle. During the fourth quarter of 2005, while the Nasdaq beat the S&P's 1.6% return by almost one percent age point, 460 of 969 information-technol ogy companies traded flat or declined, ac cording to Baseline.
A smart way to go may. be exchange traded funds, or ETFs, which either hold shares in a broad swath of tech names or focus on a specific industry within tech.
A very broad-based tech ETF, such as iShares Goldman Sachs Technology Fund (IGM), can beat the broader market in the quarter. Last year, the IGM returned about 2.9% during the fourth quarter, higher even than the Nasdaq's 2.5%.
The IGM holds shares of the usual sus pects: among them, Microsoft, IBM (IBM), Intel (INTC) and Cisco Systems (CSCO).
It's also possible to play a corner of tech with ETFs. Here there are two choices: either go with a winner, or bet on an underpelformer.
The victorious industries this year have been communications and' software, both up more than 12%.
The iShares Goldman Sachs Network ing Fund (IGN) has a nice cross-section of all the important networking-equipment companies, such as Cisco, and Juniper Net . works (JNPR). So does the PowerShares Dynamic Networking Portfolio (PXQ).
On the software front, Oracle (ORCL), the second-largest software ven dor in the world after Microsoft, has beaten sales and profit. estimates handily the past two quarters. If that means soft ware's a strong point in the economy, the industry could be a big beneficiary of this year's corporate-budget flush.
PowerShares does a nice job with its PowerShares Dynamic Software Portfo lio (PSJ), balancing Oracle with up-and comers . such as Hyperion Solutions (HYSL). Merrill Lynch's Software HOLDRs (SWH) holds Microsoft, pluS' smaller stocks that might be on an up swing, such as Symantec (SYMC), the secu rity-software vendor.
If betting on the underdog has appeal, the worst-performing industry was Inter net Software and Services, down more than 25% this year. The Internet HOLDRs (HHH), sponsored by Merrill Lynch, has ~ eBay (EBAY) and Yahoo! (YHOO), but no Google (GOOG). For that, the best bet is to stick with a general tech ETF, such as the iShares Dow Jones U.S. Technology Sec tor Index (IYW), which puts Google in with Microsoft.
Semis are the second worst perform ers, off 8.1% this year. The iShares Gold man Sachs Semiconductor Fund (IGW) is fairly spread out among several semi names, not just Intel and Advanced Mi cro Devices (AMD).
Just don't forget to hand in these shares once fall has ended. Come the first week of January, many turn back into lumps of coal. For tech, the magic often disappears with the singing of
~ Auld Lang Syne._ By Tiernan Ray
