Look Who’s Back

People are so beaten down in this stock market, they can’t even tell when things are getting better. So much money has been lost, so much pain endured – particularly in the NASDAQ – that stock investors are still looking the other way even as the Federal Reserve pumps money furiously into this economy.

But the bond market knows. The bond market’s not lying. It’s signaling, with massive losses on the long end, that there are going to be enough rate cuts down the road to eventually have a good old-fashioned boom on our hands. The bond market’s weakness often signals that corporate earnings are about to rebound. I’ve watched bonds long enough to know that investors in these staid assets see the future before it happens, and they are saying, “Get me out of bonds before the Fed takes this economy back to 6 percent growth.”

For me, after a year of bashing technology, it’s time to start buying. No, I don’t think we’ve hit bottom in terms of earnings; there’s still a ton of bad news out there. And I don’t want you to go back into the Ciscos and the Nortels, or any of those other companies that need telecommunications to boom all over again. Some think that the overbuilding in telecommunications could rival the fiasco of railroad overbuilding at the turn of the nineteenth century, and think the market will never come back. I just think that those stocks – and kin like Corning, Tellabs, JDSU, PMC-Sierra, and a host of other communications suppliers – are simply uninteresting. We have to get back into the mind-set of buying stocks that have fundamentals that are improving, not getting worse, and I can’t honestly say that any of those companies have fundamentals that are improving.

Ah, but that doesn’t mean we have to avoid all technology stocks. While we tend to regard tech as monolithic, it’s quite the opposite. Some tech stocks are extremely sensitive to changes in the economy, and these are the ones we want to load up on now in anticipation of when the Fed finally gets rates to 3.5 percent, where they are no doubt headed.

I’ve got five tech stocks that I have hated for pretty much a year now, five stocks that I am now buying precisely because their earnings a year from now could be up substantially when the economy starts rolling, as it always does when the Fed steps on the gas.

First is IBM, which has just had a huge run after a very good quarter but is pulling back just as furiously now because nobody believes the numbers are for real. Give me a break. IBM has turned itself into one of the world’s great consultant plays with a hardware kicker, and boy, do they sell a lot of hardware when rates go down and businesses feel more flush. I have always played IBM as a “cyclical,” meaning that it responds to the upturn in the economy, and this time will be no different. Take advantage of the skepticism and buy IBM for a potential 40-point gain over the next nine months. Even then, IBM wouldn’t be more expensive than the average S&P 500 stock.

Oy, have I hated the guys at Microsoft ever since they stood up to the Justice Department, à la Mike Milken. That didn’t get them anywhere other than in earnings-shortfall hell. But now, with the firm’s most recent quarter and the Mister Softee-loving new Justice Department, here’s a stock that could very quickly tack on 30 points as people realize that Microsoft hasn’t had its market share dented and, if anything, has even gotten to be a strong No. 2 to AOL on the Web. You are never going to catch the exact bottom in a stock like Microsoft, but the current mid-sixties level is certainly a great place to get started. Let’s hope it goes back to the fifties so we can buy more. That would be a gift.

For years, Advanced Micro Devices has played second fiddle to Intel, both in terms of financial performance and in semiconductor benchmarks. That’s no longer the case. AMD has been taking share aggressively in personal-computer microprocessors. Its chips win benchmarking contests pretty regularly, and the stock is cheap as all get-out. Great balance sheet, low price-to-earnings multiples, and a flash semiconductor business (they go into cell phones) that you are basically getting for nothing. A steal in the low twenties.

You know those stocks that were going to integrate your software and networks and all of that other stuff that big companies have to have in order to stay competitive? Remember that business-to-business hype? Forget about them. Electronic Data Systems, the original technology-consultant giant (remember Ross Perot?), has been winning big contract after big contract in the past year, saving companies fortunes the moment it walks in the door. Here’s a stock that could go to $100 without anyone’s even noticing, as it is a boring, non-promotional behemoth. Just what the stock doctor ordered when the Fed is cutting rates.

I know Best Buy doesn’t seem like a tech play, but BBY is the ultimate electronics provider. It’s the perfect consumer-technology play because it’s where you go when you are feeling better about the economy. It’s where you go with your tax rebate. This stock has just had a huge run, but in the next few weeks, the bears will spread the news that the month of April was just okay – it will be untrue, but that is what bears do – and you will get a chance to buy it in the mid-forties.

Now, I know these companies aren’t like the sexy old fiber-optic plays or the fast packet-switching stocks of yesteryear. You aren’t going to make nine points in a day on these. But you aren’t going to lose eighteen either. Tech can be a part of your portfolio now. It just can’t be your portfolio. Buy these high-quality tech stocks now, and wait six months for the turn to occur. And remember, don’t interpret this pro-tech call to mean that you can stick with those mutual funds that buried you in the past two years – the ones down 40 percent. Believe me, they didn’t own this kind of low-multiple, consumer- and corporate-driven technology. They wanted the most expensive merchandise, much of it still overpriced.

So don’t make the same mistake twice. Use the recent advance to bolt from the folks who crushed you, and reposition into saner, safer tech for the rest of what will now turn out to be a very good year for equities, courtesy of Alan Greenspan

Check out TheStreet.com’s “10 Questions” feature this week. Bruce Behrens and Liam Burke, co-managers of the Flag Investors Communications Fund, are on the hot seat. Available for free at www.thestreet.com.

James J. Cramer is co-founder of TheStreet.com. At the time of publication, he owns Electronic Data Systems, Best Buy, and Microsoft. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions that he takes may change at any time.

e-mail jjcletters@thestreet.com

Look Who’s Back