What’s the best way to invest in tech stocks right now? This strategy is working well for one fund manager.

Robert Stimpson, chief investment officer for Oak Associates Funds, made the case that a “financials first approach” to companies with staying power is the best one for the current environment, with risks that include rising interest rates and a possible recession.

During an interview, Stimpson, who has been with the firm for 21 years and co-manages the $544 million Red Oak Technology Select Fund
ROGSX,
+0.31%,
described his team’s approach to selecting large-cap tech stocks for “attractive valuation, high profit margins and an ability or willingness to support and recognize shareholder value.”

That last part might include share buybacks, which increase earnings per share, dividend increases or acquisitions expected to increase earnings per share.

The fund has a low-turnover approach, currently holds 26 stocks and has a four-star rating, the second-highest, from Morningstar.

A company doesn’t necessarily have to pay a dividend to be among the fund’s holdings, Stimpson said, but “it has to show respect for investors,” which includes a “non-hubristic approach to acquisitions.”

A closer look at the tech-stock rally

Here’s a one-year chart showing the movement of the Nasdaq Composite Index
COMP,
+0.62%
:

The Nasdaq has rallied 23% from its 2022 closing low on June 16 and it is now down 17% for the year. The Nasdaq-100 Index
NDX,
+0.75%
— which includes the 100 largest nonfinancial stocks in the full Nasdaq — is also down 17% this year. But even after its own 22% rally since June 16, 23 of the Nasdaq-100 are still down between 30% and 59% for 2022.

To be sure, the Red Oak Technology Select Fund hasn’t escaped this year’s broad decline — it has fallen 17% for 2022.

Despite the better-than-expected inflation numbers for July, the Federal Reserve is expected to stay the course and continue raising interest rates to cool the economy. Rising interest rates always put pressure on stock prices — even more so for tech stocks. That’s because their gains had been driven by sales growth, or even by emotional reactions to their potential for “disruptive innovation,” rather than increases in profit, cash flow and deployment of capital in ways meant to benefit shareholders.

“When we were in a zero-interest-rate environment, the acceptance of risk was much higher. Capital was cheap and companies that were not expected to become profitable for a while were acceptable,” Stimpson said.

Looking ahead, he recommends investors avoid investing in companies on the expectation that they will eventually grow into current valuations that appear “lofty.”

Fund performance

Stimpson was quick to agree that the Red Oak Technology Select Fund’s “high-quality blue-chip approach” to tech stocks underperformed during the last bull market.

“Do I wish we owned Nvidia for the past 20 years? Absolutely — it has been a monster,” he said.

But Nvidia Corp.
NVDA,
+1.73%,
Tesla Inc.
TSLA,
+3.10%
and Netflix Inc.
NFLX,
-0.08%,
which he all termed great companies, featured “returns on equities shared with shareholders” that didn’t meet the fund’s standards. He named Amazon.com Inc.
AMZN,
-0.26%
and Apple Inc.
AMZN,
-0.26%
as examples of companies that do.

Here’s a comparison of the fund’s total return to those of the Invesco QQQ Trust
QQQ,
+0.81%
(which tracks the Nasdaq-100) and the SPDR S&P 500 Trust
SPY,
+0.41%
over the past five years:

It is hardly surprising that the Red Oak Technology Select Fund trailed QQQ, when central-bank and fiscal policies did so much to support even the riskiest tech stocks. But the fund has beaten the S&P 500’s
SPX,
+0.40%
five-year performance, and depending on how you feel about the direction of interest rates and the economy, the conservative approach to technology may be the right one for you.

Stimpson said that over the past year, the fund has been reducing holdings tied to consumer electronics, because the management team believed “demand had been puled forward during the pandemic for gaming, homes, etc.” He also said they had “lightened up on semiconductors,” and increased holdings in enterprise-class software companies.

Top holdings

Here are the 10 largest holdings of the Red Oak Technology Select Fund as of June 30:

The percentage of Alphabet Inc. shares on the list above is for the fund’s combined holdings of the company’s Class C
GOOG,
+0.19%
and Class A
GOOGL,
+0.33%
shares.

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Hear from Ray Dalio at MarketWatch’s Best New Ideas in Money Festival on Sept. 21 and 22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.