Market volatility has many investors checking out of stocks, but analysts say the technology sector is a good place to stay for now.
Tech stocks lost ground with the rest of the market in a broad drubbing on Monday, June 7. Apple lost 1.4%, even as Steve Jobs unveiled the latest version of the iPhone. However, Apple's (AAPL) shares still closed up 19% for the year that day. The S&P 500 had fallen 5.7% over the same period.
The broader stock averages have suffered amid turmoil in Europe, slower-than-expected job growth in the U.S., and fear of a double-dip recession. Yet consumers have purchased more than two million iPads during the two months the devices have been on the market, and analysts say they are ready to upgrade to the new iPhone.
Technology stocks have held up well throughout the recession, and they helped lead the comeback in last fall: Techs were among the first companies to show fresh top-line growth, or profit they weren’t achieving through severe cost cuts alone.
So are they still a good bet?
Who’s Talking: Collin Gillis, technology analyst, BGC Financial
The Gist: Investors are curbing their risk and moving away from stocks in general, and the U.S. dollar is getting strong. That’s going to impact a lot of multinational companies, says Gillis.“But tech as a sector continues to be an excellent place to be – you just want to be select.”
Technology stocks will hold up in rough economic water, should it persist, because “the true productivity gains that come from current technology innovations are real,” he says. People depend on technology products like Google's (GOOG) search engine, for instance -- and that dependence isn’t fading.
At the same time, many products that wouldn't traditionally be considered non-discretionary are now leaning that way, becoming “got to have” products, he says. Broken laptops get replaced immediately. “From that perspective, there’s a degree of protection” for the sector, he says, adding that budget-minded consumers are more likely to give up a few cups of coffee from Starbucks (SBUX) than their smartphones. People aren’t going to make first cutbacks on Internet access or digital mobility, he says.
Technology companies have international exposure, but most larger technology firms' balance sheets are “unbelievably healthy," he says. The Apples and Googles have billions of cash and that should help drive M&A activity, he says.
However, not all technology companies are as secure. Gillis warns that investors should “worry about companies that have exposure to anything that’s associated with budgets that could be stalled or put off.”
Who’s Talking: Vijay Rakesh, analyst, Sterne, Agee & Leach
The Gist: “Marquee names” with strong balance sheets and product cycles have and will hold up well in this market, Rakesh says.
Investors are worried about a possible cool-down in China and the debt situation in Europe. Technology companies do have exposure to those markets, although in some cases it’s limited, Rakesh says. Some are concerned that if conditions don’t improve and the economic recovery isn’t as robust as predicted, consumers will pull back on spending, which could hurt companies that make discretionary products.
“But the U.S. seems to be on decent footing and most of the signs have been positive,” he adds. And some new products like the iPad are just on the verge of the international market and have had enough momentum to sellout in the U.S., he says.
Companies already substantially reduced risk on their balance sheets, especially in the technology sector, when the market fell out in 2009. Ultimately, “the marquee names have held up well and had a good bounce, and people should own them,” he says. If they were resilient through the downturn, they can weather what’s to come, he says.
Rakesh warns of one red flag. He advises investors to stay away from companies that might have enticing valuations but are losing market share to competitors.
From the Brokers: Links to Broker Sites and Research Ameriprise Financial Barclays Charles Schwab DWS (Deutsche Bank) Edward Jones Fidelity J.P. Morgan Merrill Lynch Morgan Stanley Raymond James T. Rowe Price Wachovia Securities
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Investing § Does the Tech Rally Have Any Life Left?: Market watchers discuss which tech stocks still have room http://url4.eu/4KYxL
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