A pair of U.S. market sectors that feature solid, cash-rich balance sheets, attractive valuations and the potential for mergers and acquisitions would seemingly rate high on investors' radar.

Yet most shareholders aren't beating a path to technology and health-care stocks.

Strategists at brokerage Charles Schwab & Co. (SCHW) took note of the combination of strong fundamentals and relative neglect and recently upgraded their outlook for the tech and health-care sectors.

Technology stocks could outperform against a favorable backdrop for business spending, said Brad Sorenson, senior sector analyst at the Schwab Center for Investment Research. "We're at the beginning of an acceleration of capital spending," he said. "As companies try to increase efficiency to better compete globally, improved technology is one way to do that."

Health-care issues, meanwhile, have been beaten down, and investment risk is largely priced into the shares, Sorenson added. In addition, the strategist said he expects merger and acquisition activity to accelerate as large pharmaceutical firms seek to broaden their product pipelines.

The upbeat call for tech and health care coincides with an expected slowdown in U.S. corporate growth, Sorenson said. He anticipates that the Federal Reserve's cycle of short-term interest-rate hikes is nearing an end.

"If [the Fed] shows more of a hand that they're close to done, we could see an overall rally in the market," Sorenson said. With earnings growth becoming scarcer, investors would look to the growth-driven stocks that dominate technology and health care, he added.

In technology, the Schwab research group favors semiconductor firms like National Semiconductor (NSM) and information-technology concerns such as Tech Data (TECD).

Schwab's health-care sector recommendations -- which emphasize valuation, analyst ratings and shares' momentum -- include Amerisource Bergen Corp. (ABC) , King Pharmaceuticals Inc. (KG) and McKesson Corp. (MCK) .

"Health care offers defensive characteristics against a further economic slowdown that we are currently projecting, while offering growth characteristics that could allow for earnings expansion," Sorenson wrote in a report to clients.

Maximum Exposure

Many mutual-fund managers would agree that technology and health care offer ample opportunities. Some are confident enough to allocate substantial portions of their portfolios to these sectors.

For example, Smith Barney Large Cap Growth Fund (SBLGX) had 28% of its $6.1 billion in assets committed to tech and another 22% to health care. Manager Alan Blake is drawn to shares of out-of-favor companies that nonetheless sport rapid earnings growth, solid management and a dominant market share.

The fund manager displays "a keen eye for recognizing quality growth companies amid short-term blips in their stock prices," wrote Kerry O'Boyle, an analyst at investment researcher Morningstar Inc., in an early January report.

The Smith Barney fund is a concentrated portfolio, with about 43% of assets in its top 10 holdings. At Dec. 31, the fund's biggest stakes were Internet retailer Amazon.com Inc. (AMZN) , biotechnology giants Genentech Inc. (DNA) and Amgen Inc. (AMGN) , and semiconductor leader Texas Instruments Inc. (TXN) .

Another technology and health-care true believer is Brandywine Blue Fund (BLUEX) , with about 44% of its $1.3 billion asset base invested in these two areas.

Manager William D'Alonzo also runs a focused portfolio, keeping about 44% of assets in his 10-largest positions. Holdings in Coventry Health Care Inc. (CVH) and Aetna Inc. (AET) reflect some main health-care ideas, while tech is represented in part by investments in Oracle Corp. (ORCL) , Adobe Systems Inc. (ADBE) , Juniper Networks Inc. (JNPR) and Analog Devices Inc. (ADI)

Tech and health care account for 42% of First American Large Cap Growth Opportunities Fund (FRGWX) .

Co-managers Thomas Gunderson and Hal Goldstein stash big portions of this $1 billion portfolio in shares of Unitedhealth Group Inc. (UNH) and Medtronic Inc. (MDT) , a medical-device firm. A good portion of the fund's tech weighting comes from Microsoft Corp. (MSFT) , Intel Corp. (INTC) and Google Inc. (GOOG)

ABN AMRO Growth Fund (CHTIX) has 23% of its $1.3 billion asset base in technology and another 17% in health care.

Tech holdings in this large-capitalization fund include Qualcomm Inc. (QCOM) and Texas Instruments. Co-managers Bernard Myszkowski and Richard Drake also invest in medical-device maker St. Jude Medical Inc. (STJ) and biotech firm Gilead Sciences Inc. (GILD)

"Myszkowski and Drake's focus on profitable, financially strong growth stocks may not be sexy and won't always be popular, but it's an attractive approach for long-term investing," wrote Morningstar analyst David Kathman in an early January research report.

Another portfolio with its heart in tech and health care is Goldman Sachs Growth Opportunities Fund (GGOAX) . The $2.1 billion portfolio has 19% of assets in tech and another 16% in health care.

Top holdings include: medical-device manufacturer Biomet Inc. (BMET) ; Fisher Scientific International, the laboratory research supplier (FSH) ; bar-code developer Zebra Technologies Corp. (ZBRA) , and semiconductor leader Linear Technology Corp. (LLTC)

"We're confident about the longer-term prospects for the fund," Morningstar analyst John Coumarianos wrote in a report on the Goldman Sachs offering last September. "Although it may not keep up with its more aggressive peers in a tech rally, we think its attention to long-term cash flow generation can help it in a slower-growth environment, when an earnings miss can send a richly priced stock reeling."

5 funds that favor tech and health-care stocks:

Fund Technology % Assets Health Care % Assets 1-year return 3-year annualized return
Smith Barney Large Cap Growth A (SBLGX) 28.2% 22.2% 9.66% 15.96%
Brandywine Blue (BLUEX) 25.5 18 17.47 21.21
First American Large Cap Growth Opp A (FRGWX) 23.5 18.2 12.21 15.01
ABN AMRO GROWTH N (CHTIX) 22.9 17.1 7.54 11.29
Goldman Sachs Growth Opp A (GGOAX) 19.2 15.8 13.25 20.38

Sources: Morningstar Inc. (allocation date as of 12/31/05); Lipper returns as of Jan. 30.

Copyright (c) 2006 MarketWatch, Inc.