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The Bullish Case for Tech Stocks

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It was the best performer last year and strategists say it still has more room to run.

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The tech sector tore it up in 2009, and some strategists predict it will do the same this year.

This week marks the first anniversary of the March 2009 low. The S&P 500 bottomed at 666 on an intraday basis on March 6, 2009. On a closing basis, it bottomed at 676.53 on March 9, 2009, and since then it has climbed up 68.3%.

The question for investors to noodle on, says Dr. Ed Yardeni of Yardeni Research, is this: Will the sectors and industries that outperformed and underperformed the market during the first year of the bull market do it again?

Yardeni thinks they will.

The best performing sectors since the bottom on March 9, 2009: Financials (144.4%), Consumer Discretionary (98.6), Industrials (95.3), Materials (84.0), and Tech (82.6).

The worst performers: Telecom (17.3), Utilities (33.0), Energy (39.1), Consumer Staples (42.2), and Health Care (46.3).

For all of 2009, though, Tech actually clinched first place with a gain of 59.9%. Yardeni tells clients that he thinks it will win the gold again this year.

"Industry analysts are raising both their 2010 and 2011 estimates as the sector continues to deliver more positive earnings surprises than the other sectors," he says. "Revenues are growing, and doing so on a worldwide basis."

The strategist's favorite Tech subsectors: Semiconductors, Semiconductor Equipment, Computer Hardware, and Communications Equipment.

The Tech space is obviously a huge one, encompassing a lot of different sectors, from chip makers like Intel (INTC) to Internet giants like Google (GOOG).

But there are some common themes in Tech that its fans point to: Companies that tend to have big global footprints and strong, clean balance sheets.

Tech companies in the S&P 500 Index now trade at 15.4 times estimated 2010 earnings versus 14.6 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.

We spoke with two other well-known investment pros that are also dedicated Tech bulls.

Mike O'Rourke, BTIG's chief market strategist, recently explained to us why he's overweight Tech.

"Valuation is attractive," he mentioned in our article, Is This the October 1987 Sequel? "We know the leaders in the sector are performing, and many of them put up record revenue numbers in the fourth quarter. And this is all during the Great Recession so imagine what happens when some economic strength emerges."

We also touched base for a brief chat with Vinny Catalano, president and global investment strategist with Blue Marble Research. He is still a Tech groupie, banking on the sector enjoying better times ahead as companies increase spending on computer equipment.

"There is potential for a significant increase in CapEx [capital expenditure] spending going forward," says Catalano. "CapEx spending has been really rather depressed. Even so, the technology sector has been able to generate some very good gains in profitability and sales. So, with any boost in CapEx spending, many tech companies will benefit."

Catalano 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).

For a more skeptical take on Tech, however, we also checked in with Peter Boockvar, Miller Tabak's equity strategist.

"The love affair with Tech never fades," Boockvar emailed us. But he emphasizes that the group is cyclical and hugely dependent on the health of the US consumer.

"Yes, Apple (AAPL) can grow under any economic scenario, but the same can't be said for many other areas of Tech," Boockvar notes, adding that while Tech does have the tailwind of global growth, it has been buoyed by an inventory rebuilding process in a big way.

Thus, a bet on Tech, at this point in its run, at this valuation, he says, is a bet that global growth will pick up to the extent that end demand takes the baton from inventory building.

"That baton may pass in Asia," Boockvar says, "but it won't in the US in 2010."
No positions in stocks mentioned.
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