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Confidence in tech stocks returns
|03 июня 2008|
When Brian Belski, sector strategist at Merrill Lynch, floated the idea of increasing investment in technology stocks as a hedge against the US economic slowdown to his institutional clients recently the response was a deafening silence.
“Tech is the second best performing sector so far this quarter trailing only energy, but no one seems to care,” he said.
Technology stocks are not normally viewed as a safe haven in a downturn. When earnings growth becomes hard to find and equity valuations fall, investors tend to plump for seemingly safer investments.
“There is this evil spectre [view] almost of technology,” Mr Belski said. “[During the bursting of the dotcom bubble] technology drove the market lower. It is really difficult for people to even look at technology because although a lot of people made money, a lot lost money also and they remember that more.”
Fears about US tech stocks appeared well founded until recently. Last November the sector quickly tumbled about 16 per cent from its post dotcom boom highs after the chief executive of Cisco Systems said that a “dramatic” decline in sales to automobile and financial companies was curbing growth.
Since then – and until recent weeks – the sector has consistently underperformed. In the first quarter of 2008 tech was the worst laggard among the main industry groups of the S&P 500, falling 15.4 per cent.
But strategists and portfolio managers are slowly realising the sector offers attractive relative growth prospects.
Stocks in the sector have shrugged off their dismal first quarter performance, to bounce about 14.4 per cent, so far in the second quarter.
Decent first quarter earnings from the likes of Google, Dell and Intel suggest technology sales and profits may be more robust than expected. According to Citigroup, the sector reported an earnings growth rate of 14.6 per cent during the first quarter, and it is estimated to grow at 23.2 per cent for 2008.
Richard Keiser, technology strategist at Sanford C Bernstein, said: “First quarter results were not outstanding but there were clear examples that spending has not disappeared and investors focused on the relative growth, which is why you have seen more dollars flow into the sector.”
That optimism is given some support by the latest macro-economic numbers. According to an analysis of the data by Merrill Lynch, while US economic growth almost stagnated in the first quarter the computer/peripheral sector expanded at a 17.9 per cent annualized rate and software expanded at an 8.8 per cent annual rate.
In April, industrial production slid 0.7 per cent but output in the tech sector rose 1 per cent month on month and by 25 per cent year on year.
Analysts point to a number of structural changes in the sector since 2001 to explain its recent robustness.
Most significantly, said Mr Keiser, overcapacity is no longer an issue as technology firms and their customers have become more disciplined about measuring returns on investment. Infrastructure replacement and specific projects, with clear goals, are the main components of demand.
Many tech companies have also boosted the service and maintenance elements of their portfolios, swapping lumpy one-off purchases for recurring revenue streams from support contracts. IBM for example, made about 30 per cent of its revenues and 60 per cent of profits from such sources.
The combined effect of these developments has been to make technology revenues both more visible and more resilient – two attractive qualities in times of uncertainty – says Jack Caffrey, an equity strategist and portfolio manager at JP Morgan Private Bank, which has $487bn in assets under management.
Mr Caffrey now has 20 per cent of his portfolio invested in the sector having boosted his holding from 15 per cent in April.
Three factors are likely to be particularly important in determing the sector’s performance in the medium term. Declining margins in certain technology sectors are of particular concern, while companies with a smaller percentage of their business in recurring revenues streams, such as Cisco, may be more exposed to the order delays that accompany most downturns.
As corporations worry more about the bottom line, projects that take longer to realise returns could come under pressure. That bodes poorly for some and better for others. Virtualization software providers could benefit for example, because the product can be implemented in a matter of days allowing clients to use servers more efficiently and reduce costs.
One more potential pitfall may lie ahead. Technology’s exposure to global growth is often touted as a key strength, but it may be something of a red-herring according to analysts. While currency translation effects and better pricing power can be beneficial, they are difficult to predict and many tech companies price in dollars anyway.
“Historically, sell side analysts have a very poor track record of accurately forecasting the impact of currencies on results,” said Mr Keiser, and that means more earning surprises on the upside and the downside.
Still, there are signs that confidence in the sector is returning. According to a Citigroup survey of small and mid-cap-focused institutional investors, more than 56 per cent of respondents suggested technology would be among the best performing sectors in the remainder of 2008. That was a notably more positive view than expressed in November 2007 and was the most bullish opinion on any sector.
Источник: Financial Times