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CNBC: Play Defense in Risky Tech

Phyllis Burke Goffney

Technology stocks still face some turbulence, and analysts say it may be a good time to stick to the more defensive names in the group.

This week's tech washout sent alot of investors in the group to the sidelines as the S&P technology sector fell 3.4% and the Nasdaq lost 2%, its worst week since last July. Nasdaq is still up 1.5% since Jan. 1.

Said CNBC's Jim Cramer, who on Wednesday said it's time to sell tech shares, "People are leaving the group because they know the party ends right now and begins again in September."

The tech sell-off this week has renewed debate about tech seasonality, an annual event in eight of the 11 years when tech stocks have surrendered ground in the beginning of the year.

In fact, Bear Stearns today issued a research note on the trend. Analyst Andrew Neff said technology stocks tend to underperform, relative to the market between February and May, based on an analysis of 20 years of trading data.

"Factor Seasonality"

"While we see the continuation of a moderate growth environment for technology spending, we think investors need to factor seasonality into consideration, as it often leads to pullbacks and a reversal of positive sentiment," said Neff in his note.

Neff said investors have a couple of choices. They could wait for the downturn to end, hedge their current positions or focus on more defensive stocks in the group early in the year.

CNBC's Jim Cramer said on "Mad Money" Wednesday night that the time has to come to sell tech based on seasonality. He said there are several stocks he continues to favor but for the most part the group should be avoided. He went negative on semiconductors, software, storage and heandheld computers.

The stocks typically do better in the fall when corporations make spending plans and consumers shop for electronics for the holidays.

Strong Products and Earnings

Cramer suggests investors stay with tech stocks if they have strong products and strong earnings.

"I think tech will ultmately outperform this year, but most of the performance will be after September," Cramer told CNBC.com. Cramer said for now, semiconductors are the most dangerous group for investors.

Some high profile names in the sector were punished severely as they reported earnings this week. Apple, for one, fell sharply after it disappointed investors with its forecast.

International Business Machines, which reported fourth-quarter results Thursday, was sold off after it reported earnings that beat Wall Street expectations but still disappointed investors. The stock had risen 21% over the past 12 months.

Latest Prices on Tech Stocks

"Tech investors can sometimes forget that a 50-year old muti-billion dollar company is not going to experience the upside surprises in the order of magnitude that a small multi-million dollar company experiences," Dawn Talbot, Technology Analyst. "IBM outperformed even a lot of the whisper numbers that were out there, so there was no reason to hit it as hard as it was hit."

Price Swings Exaggerated

Analysts note that some of the price swings were exaggerated in the selling wave. The Sox semiconductor index finished the week down 5%.

"Every time these sell-offs have stopped, at least over the last four years, they've stopped at successively higher points than the previous year," Jonathan Hoopes, technology analyst at ThinkEquity Partners, told CNBC. "Then look at what they do afterward: They rally--to much, much higher highs."

Hoopes recommends Apple, Cisco, Hewlett-Packard, Microsoft and Google. "Those are stocks with recurring revenues, super strong brands, good topline revenue growth and they are exposed to the ipod generation."

But David Tice, portfolio manager of the Prudent Bear Fund, believes the sellers are right and technology stocks should be avoided right now.

"These stocks ought to be sold," Tice said. "A lot of companies in tech have been warning since August.  You look at companies like National Semiconductor, it's been talking about this for some time and tech stocks haven't been going down."

Although the technology sector has risen 20% since July, it's down about 4% from highs established last week.

Despite the rough week for technology shares, some analysts remain optimistic about the sector. Scott Kessler, director of the Information Technology Research Group at Standard & Poor's, is sticking with his market-weight position on the sector.

"Perhaps there's some profit-taking occurring here, but for the most part, we think fundamentals are intact," Kessler told CNBC.  "Companies continue to repurchase shares and perhaps, most importantly, we look at the valuations as full."