By David Randall
NEW YORK (Reuters) - When the Nasdaq Composite last hit record highs during the dotcom era, fund manager Walter Price struggled with justifying paying 400 times a company's earnings for rapid growth.
Now, with the Nasdaq setting new closing records for the first time in 15 years (although it is still short of its all-time intraday high), valuations are a sliver of what they were during the last boom. Instead, Price worries that the companies that have powered the 25 percent rally in the Nasdaq over the last year are likely to plateau.
"What brought us here isn't likely going to keep pushing us forward," said Price, lead portfolio manager of the Wells Fargo (NYSE:WFC) Advantage Specialized Technology fund. "We have a large position in Apple (NASDAQ:AAPL), but to say that Apple is going to double from here is not realistic."
It is a concern of other top technology fund managers, as well. With the Nasdaq Biotechnology index up more than 60 percent over the last 12 months and social media companies such as Facebook (NASDAQ:FB) jumping 50 percent over the same time, the gains in both of these sectors will likely be muted in the year ahead, fund managers say.
Instead, they are looking to what they see as the largest growth areas over the next three years: cyber security, cloud services and electronic payments.
Price, for instance, has been cutting his position in Facebook and adding to cloud computing companies such as Cognizant Technology Solutions (NASDAQ:CTSH) Corp and payments company Visa Inc (NYSE:V). He also remains bullish on Amazon.com Inc (NASDAQ:AMZN), which posted operating margins of 16.9 percent last quarter in its Amazon Web Services cloud computing division.
"That's worth the value of Amazon today," given the potential for growth in the cloud business, he said. "To me, you are getting all the retail business for free."
Sandy Villere, co-portfolio manager of the Villere Balanced Fund, boosted the overall level of technology stocks in his portfolio by 17 percent, the greatest increase among funds tracked by Lipper. Most of that went into adding to and buying so-called back office technology companies such as DST Systems Inc, which specializes in data management in the insurance, healthcare and financial services industries.
"I don't think the Nasdaq is overvalued at this point. I'm just looking for tech companies that dominate a niche, and this niche is growing," he said.
There are few signs that fund managers as a whole are overly bullish on technology, even as the Nasdaq posts records. The average fund has 17.7 percent of its assets in technology companies, roughly matching the average of 17.8 percent invested in the sector in 2010, according to Lipper data. The benchmark S&P 500 index, by comparison, has a 19.7 percent weighting in technology, its largest sector.
Even fund managers who pride themselves on making out-of-favor bets say there are still opportunities in biotech despite its rally.
Daniel Kozlowski, portfolio manager of the $4.6 billion Janus Contrarian Fund, added a position in animal health company Zoetis Inc (NYSE:ZTS), a spinoff of Pfizer Inc (NYSE:PFE), in the fourth quarter. Yet he's also adding to little-followed hardware companies such as Knowles Corp, which makes microphones used in the iPhone.
"We're only interested in special situations, such as spinoffs, in biotech because so much of that market is so expensive. We prefer instead to go places where there's little interest and be in early and get out early," Kozlowski said.
Skip Aylesworth, portfolio manager of the Hennessy Technology fund, said that he now has been reducing his position in biotech companies such as Gilead Sciences Inc (NASDAQ:GILD) and moving more money to cyber security companies, which now take up approximately 10 percent of his portfolio. As more companies move key parts of their businesses to the cloud, the importance of protecting data will only grow, he said.
"The development of these companies is not driven quarter-by-quarter," he said. This is a trend that's going to play out for at least the next three years."