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business newsTaking a Second Look at Tech
By
Josh Lipton Mar 30, 2010 7:40 am
The sector hasn't been attracting investors so far this year, but that could change.
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One sector that doesn’t appear so sought-after, however, is the same one that turned out an awesome performance last year: Tech.
For all of 2009, Tech actually clinched first place with a gain of 59.9%. But, as we head into April, the love from investors hasn’t been as pronounced: Tech stocks in the S&P 500 are up just 1.8% year-to-date.
That performance places them well behind the gains of Industrials (+11.9%), Financials (+11.2%), and Consumer Discretionary (+10.9%), although still besting Telecommunication Services, Utilities, and Energy, which are all in the red.
As we wrote in our recent article The Bullish Case for Tech Stocks, the Tech space is huge, encompassing a lot of different sectors, from chip makers such as Intel (INTC) to Internet giants like Google (GOOG).
However, Tech groupies do emphasize the common themes they appreciate in the sector, specifically the outsized global footprints as well as the strong and clean balance sheets of so many tech-focused firms.
Tech companies in the S&P 500 Index now trade at 15.9 times estimated 2010 earnings versus 14.9 for the market. However, the sector’s PEG, or its price relative to its expected earnings power, is cheaper than the overall market: 1.1 versus 1.4.
Vinny Catalano, president and global investment strategist of Blue Marble Research, says part of what we’re seeing right now is this: The pros are pocketing profits from last year’s winners, like Tech, and re-directing the money into other hot sectors.
“There is a certain amount of rotation going on here,” says Catalano. “That is all temporary, I think, but it is part of the game. We go through these rotational cycles during a bull market.”
Catalano, however, is still a Tech fan, believing it is one of the better areas for stock pickers to be in. He is betting on the sector benefiting as companies ramp up their spending on computer equipment.
He plays the theme with the iShares Dow Jones US Technology (IYW), an ETF with holdings including Cisco (CSCO), IBM (IBM), Microsoft (MSFT), and Oracle (ORCL).
Interestingly, there is another reason to remain optimistic about the sector, looking ahead: Information Technology doesn’t look as exposed to the side effects of ObamaCare as other sectors.
Specifically, Dr. Ed Yardeni of Yardeni Research notes that Tech companies don’t have significant health-care obligations to retirees.
That’s good news because major US corporations -- including AT&T (T), Caterpillar (CAT), and Deere (DE) -- have already said that a tax provision in the new health-care law will make it far more expensive to provide description drug coverage to their retired workers.
The current tax structure won’t change until 2013, Yardeni writes, but company executives say they’re preparing for the higher costs now.
Also, Yardeni points out, Tech companies tend to retain their earnings rather than pay them out as dividends, which will soon be taxed onerously to pay for ObamaCare.
As Barron’s points out, the tax on “unearned income” for wealthier Americans could diminish the allure of stocks with juicy dividend yields, relative to growth stocks with no dividends.
For his two cents, we also checked in this morning with Sean Udall, a frequent Minyanville contributor.
Tech might be underwhelming us right now, says Udall, but of course it all depends on what names line your portfolio.
“Apple (AAPL) and Intel have outperformed the S&P 500 by a bunch,” he notes. “There are quite a few names that have made big moves.”
Udall tells us that he’s still bullish on the sector, forecasting that Tech will be the second best performing sector this year, after Financials.
Udall emphasizes Tech’s good-looking balance sheets, solid earnings power, and what he predicts will be significant IPO strength in the next 18 months, themes that he outlined in his article, Tech Themes for 2010.
There, Udall wrote that he expects networking and data storage firms to benefit from the $50 billion government broadband and security infrastructure package that’s ready to roll over the next few years.
Moreover, he argued, technology mergers and acquisitions continue to exhibit strong activity with further consolidation across the sub-sectors. Expect underperforming stocks with pristine balance sheets to garner increased attention this year, he said.
No positions in stocks mentioned.
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