Techs are market leaders -- again
Some investors may have sworn off technology stocks after getting burned in the dot-com meltdown, but that hasn’t stopped the sector from resurging like a phoenix.
As the stock market has gyrated wildly this year amid the sub-prime mortgage fiasco and recent worries about corporate earnings, tech shares have emerged as market leaders.
The CBOE Technology index is up 21% this year -- more than triple the gain of the Standard & Poor’s 500 index -- but still down a hefty 38% from March 2000, when the Internet-driven bubble peaked.
Fans say tech has several things going its way, including significant overseas sales, reasonable share prices relative to company earnings, and the potential to grow in a slowing economy. Bulls also argue that the industry has matured and the mania of the dot-com era has not reappeared, at least not yet.
“The clear difference between now and then is now I don’t see companies that don’t earn money and are just an idea,” said Patrick Becker, a money manager who specializes in tech stocks at Becker Capital Management in Portland, Ore.
And tech is probably as protected as any sector from the sub-prime and housing contagion.
“You don’t have much exposure to the housing market, at least not directly,” said Kevin Landis, chief investment officer of the tech-focused Firsthand Funds in San Jose.
But be careful.
Though tech may do well in a plodding economy, it would be hit hard in a recession as consumers and businesses reduce spending.
There also are signs that the sector may be getting ahead of itself.
The recent surges in bellwether stocks such as Google Inc. and Apple Inc. are reminiscent of the late 1990s, when investors crowded into a small constellation of big-name techs as stocks in other industries stalled.
Google shares jumped above $700 last week on excitement about the company’s plans for mobile phones. But the shares, which are up 54% this year, trade at a pricey 45 times the average analyst estimate of Google’s per-share earnings, according to Bloomberg. Apple, which has more than doubled this year, trades for 38 times earnings.
Although companies going public now are more seasoned than eight years ago, some recent initial public offerings have featured younger companies, said Noor Kamruddin, manager of the Wasatch Global Science and Technology fund.
“It seems like a little bit of froth has come back,” Kamruddin said.
Tech is clearly back in vogue, and some experts say the sector has more gains to come.
The enthusiasm stems partly from tech firms’ earnings prospects.
Based on analysts’ projections of individual companies’ earnings, the average profit for tech companies in the S&P; 500 is expected to rise 15% this year, compared with only 5.5% for the overall index, said Sam Stovall, Standard & Poor’s chief investment strategist. Next year, earnings are projected to grow 24% for tech firms and 14% for the S&P; 500.
Growth is coming from consumers drawn to Apple’s iPhones and other wireless devices as well as from businesses, which are upgrading computer systems, experts say.
Though adoption of Vista, the latest version of Microsoft Corp.’s Windows operating system, has been slow, the pace will pick up because many companies have waited until the initial bugs were worked out, Becker said.
Even as stock prices rise, the sector’s projected earnings growth keeps tech shares from looking expensive.
Based on profit forecasts for the next four quarters, the price-to-earnings ratio for tech companies in the S&P; 500 is 19, according to Thomson Financial. That tops the 14.9 for the overall S&P; but is far less than the 29.1 that prevailed when tech stocks bottomed in late 2002.
Tech companies also do a lot of business in booming overseas markets. About 56% of tech revenue comes from international sales, compared with 45% for the S&P; 500, Stovall said.
Indeed, the strongest growth will come from overseas, particularly less developed markets, some expert say.
“Although [U.S.] consumers may be in a recession, there is a growing base of middle-class consumers emerging in India and Brazil and China,” Kamruddin said.
International expansion is getting a boost from the declining dollar, which is not only goosing companies’ bottom lines but also giving U.S. companies a pricing advantage against foreign competitors.
“The recent weakness in the dollar only makes our products more affordable in overseas markets and helps us grow in those markets,” said Sanjay Mehrotra, chief operating officer of SanDisk Corp., which makes flash memory cards.
International sales accounted for 65% of the Silicon Valley company’s revenue in the third quarter, compared with 54% a year earlier.
The new enthusiasm for tech is a big contrast to the dot-com implosion in 2000.
“The aversion to tech, treating tech like a hot stove, has changed in the minds of investors,” Landis said.
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