Beware of "Tech" Stocks

Many people hear the word "technology" in connection with an investment, and think immediately of computers. Fair enough. But the term is really so broad that it's kind of meaningless -- and can even be misleading.

Sure, there are the obvious kinds of technology companies. IBM (NYSE: IBM  ) has been making computers almost since they first became available, although hardware makes up a small part of its overall business now. Just 18% of revenue and 8% of its net profit came from its computer-making systems and technology segment in 2009. Oracle (Nasdaq: ORCL  ) earns the vast majority of its money from software licenses, sporting double-digit percentage annual growth in sales and profits since 2005. Both companies and many other tech stalwarts have strong long-term growth records.

Eye of the beholder
But you'll find companies that are heavy users or developers of technology in all kinds of unexpected industries. Think of airlines, pharmaceutical companies, medical device makers, energy exploration companies, and automakers. See? It's everywhere.

Don't take "tech" investment options at face value. Look, for example, at the iShares S&P North American Technology (NYSE: IGM  ) exchange-traded fund. It's invested in the usual suspects, such as IBM and Apple. But it also treats Automatic Data Processing (Nasdaq: ADP  ) as a tech company, even though its simple business seems anything but "techy." It processed more than $1 trillion in payroll payments during 2008. You'll also find the credit card network duopoly MasterCard (NYSE: MA  ) and Visa (NYSE: V  ) , whose common business strategy is one of the oldest in business: acting as a middleman to facilitate money transactions.

If you really want computer- or telecommunications-oriented funds, seek out ones with those words in their names -- and check the lists of the stocks they own, too. Otherwise, you may end up with something like the mishmash of constituents of the S&P North American Technology Sector Index.

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