First, the good news. Corporate spending on data storage as well as networking software and services will rebound soon.
So said Jim Callinan, chief investment officer of RS Investments' growth group and manager of tech-laden $1.2 billion RS Investment Trust:Emerging Growth (RSEGX). Callinan's remarks were made June 12 to institutional analysts and strategists in Boston.
Callinan also forecast bad news. Tech and other highflying sectors are bound for a correction once investors start to see second-quarter earnings. Callinan also co-manages $56.2 million RS Investment Trust:Information Age (RSIFX) and $41.6 million RS Investment Trust:Internet Age Fund (RIAFX).
The reason for the impeding sell-off is that investors have pumped a lot of top performers up to valuations beyond what their earnings warrant, he said.
Emerging Growth is a small-cap fund. Callinan is already taking defensive steps with that portfolio.
He cut Marvell Technology Group (MRVL) over the past 13 months. This year he has trimmed MicroStrategy Inc`A` (MSTR) and OmniVision Technologies (OVTI).
And he sold all or pared positions that were has-beens or laggards.
Those included nursing-home operator Sunrise Senior Living (SRZ), which is down 4.98% this year vs. a 14.9% gain for the S&P 500.
Also getting the knife, managed-care provider AMERIGROUP Corp (AGP) is up 26% this year, but has lagged the 35% gain for its Medical-HMO industry group. And drug maker Barr Laboratories (BRL) is up 50%. But its Medical-Generic Drugs group is up 74%.
"Those value-oriented names were last year's stories or the year's before that," Callinan said. "They were cheap, slow growers. They were almost bond proxies, not fast-growing, growing-top-line stories."
He used money from those sales to buy stocks poised for growth.
Example: Brokerage AmeriTrade Holding (AMTD) bought Datek in mid-2002. It started the year at 5.66. But in the sell-off before the Iraq war it hit a low of 3.96 on March 14.
It's up 109% since then, trading around 8.
Callinan also bought Angiotech Pharmaceuticals (ANPI). The firm makes the drug used by Boston Scientific (BSX) in its drug-coated heart stent.
He's owned O2Micro Intl (OIIM) more than two years. He added to his position as the stock ranged between 7 and 10 from January to March. Now trading around 14, the stock is up 53% this year.