Strength of Technology Stocks Surprises
By Andrew Leckey
Technology is the surprise investment leader this year.
The overly cautious stance on technology orders by many of the world's shell-shocked companies last year now benefits tech firms that are finding greater-than-expected demand for their products and services. While industry fundamentals can't be characterized as good, they are better than expected.
Science and technology stock funds are up 13 percent this year, versus the 2 percent decline of the average diversified stock fund, according to Lipper Inc. Among the tech-firm royalty, Apple Inc. (AAPL) stock is up 40 percent this year, IBM Corp. (IBM) up 22 percent and Google Inc. (GOOG) up 21 percent.
"There's been restocking of inventory of hardware, semiconductors and other components since the beginning of the year," said Rich Parower, portfolio manager of the $218 million Seligman Global Technology Fund (SHGTX), up 10 percent this year. "Manufacturers, customers, distributors and resellers had slammed the brakes on their tech buying right after the Lehman Brothers debacle last year."
Fearful of being caught with the "hot potato" of holding too much inventory in hard times, companies severely cut back purchases of items such as processors and personal computers last year, Parower said. Once the year began, manufacturers, their company customers and investors realized that even though demand would be lower than in the past, it would not be a disastrous situation after all, he said.
The quirks of the economy, rather than news about individual technology companies, will rule these stocks this year, some experts said. Macroeconomic issues such as gross domestic product, unemployment and housing will constantly affect stock prices, Parower said. One positive ahead is the seasonality of technology investing, because the stocks of these businesses historically perform best in the fourth quarter.
Computer security is an ongoing concern of companies these days.
Security software firms McAfee Inc. (MFE), Symantec Corp. (SYMC) and Check Point Software Technologies Ltd. (CHKP) are large holdings of Seligman Global Technology featuring good business models, road maps for future products and the likelihood of many years of success, Parower said. There's low risk of them "blowing up" with bad quarterly results, he said.
Synopsys Inc. (SNPS), providing software for designing semiconductors, is another large holding because its subscription revenues provide good visibility of its progress. In the United Kingdom, Micro Focus International Plc (MCRO.L on the London Stock Exchange) offers tools that help information technology departments make mainframe-based applications more efficient, modern and cost-effective.
Investors sometimes get a little crazy when they consider tech stocks, so try to keep a cool head.
"People who say 'I love my BlackBerry' think they should own shares of Research in Motion (the BlackBerry's manufacturer), or those who say 'I love my iPod' think they should buy Apple stock," said Samuel Wilson, co-director of technology research for JMP Securities in San Francisco. "You must forget the fad and hype surrounding technology and focus instead on the fact it is a cyclical business."
Financial data on the technology industry is not as dismal as it was two months ago, Wilson said. Yet an investor should still be careful to play as much defense as offense, remaining fully aware that tech is more volatile than the stock market as a whole.
Because this is not something to be entered into lightly, don't make tech the bulk of your personal portfolio, experts said.
"An investor must have a strong stomach and also an overall outlook on the economy to invest in technology," Wilson said. "Too many investors become obsessed with finding the next Microsoft, fall in love with tech stories and hold their stocks forever."
Cisco Systems Inc. (CSCO) and Hewlett-Packard Co. (HPQ) are stocks worth investors' consideration because large-cap tech offers the most potential and durability, Wilson said. Both firms are profitable and cash-flow positive, hold defensible market positions, and "you know they're going to be around in three years," he said.
Never known for their dividends in the past, tech firms as a group now provide average yields of around 2 percent.
The dividends are also considerably more secure than those of traditional dividend-paying financial companies that are cutting or eliminating their dividends, experts said. For example, Intel Corp. (INTC) has a nearly 4 percent dividend yield, Microsoft Inc. (MSFT) a 2.5 percent yield, and Oracle Corp. (ORCL) is initiating its first-ever dividend in May.
"Technology companies generate massive cash flows each quarter, have strong balance sheets and little or no long-term debt obligations," said Scott Kessler, senior director in information technology for Standard & Poor's Corp. in New York, pointing out that this contributes to dividends becoming another factor to consider.
Stock of giant firms Google Inc., Hewlett-Packard and IBM receive "strong buy" recommendations from Kessler. Investors are going through a process of sector elimination these days and these stocks are well-known to them.
By comparison, discretionary stocks such as autos and homebuilders won't have a recovery anytime soon, he said, while consumer durables are good but investors have already been hiding out in those for some time.
"The large-cap tech names have a lot of financial wherewithal, so they can continue to invest in research and development and buy up smaller companies," Kessler said. "While the industry fundamentals aren't great, they aren't awful either, and they're better than a lot of other sectors."
(Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, AZ 85004-1248, or by e-mail at email@example.com.)
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