Technology comes to the rescue
Published: April 24 2009 19:27 | Last updated: April 24 2009 19:27
In the last two recessions, financial stocks led equities up from their bottom. But with investors still nervous about investing in the companies that triggered the slump, an unexpected hero has come to the rescue: technology.
The
sector is the top performer on the benchmark S&P 500 index for
2009, while the Nasdaq Composite index, which is heavily weighted
towards technology, is the only significant US market measure to be in
positive territory for the year.
By Friday afternoon, the Nasdaq was on course for its seventh straight week of gains for the first time since the end of 2005. From a low of March 9, it has increased by just over a third.
With investors wondering whether the landscape for the financial sector has changed forever, many believe that technology companies are the ones most likely to benefit from the eventual upturn.
“I think tech stocks will continue to lead the way,” says Terry Morris, senior vice-president of National Penn Investors. “The financials are not ready to lead yet; that sector will continue to have its problems in the longer term.
“Most tech companies have very little debt, and the Microsofts and Googles of this world in particular have a lot of cash.”
The majority of companies in the sector have hoarded cash, even in areas where capital spending is necessarily high, such as microchip manufacture. There was relatively little merger activity before the crisis and dividends remained low even at fast-maturing companies.
Dell, for example, has never paid a dividend, preferring to keep a tight control of cash flow by returning money to shareholders through share buybacks.
Part of the reason for these companies’ defensive tactics is the pain they suffered when the tech bubble burst, which continues to have a psychological impact.
“The experience of the dotcom bubble left an indelible mark on the management of tech companies and that led them to be more rational about how and where they spent money,” says Robert Siewart, portfolio manager at Glenmede.
Whatever the reason for not splashing cash during the boom times, the sector now finds itself well placed in the new world order.
After the near-collapse of the debt markets, investors have begun to look more carefully at balance sheets and many care more about cash positions than they do about earnings. Leverage has become a tarnished word and investors flock to companies with the safety cushion that cash provides.
‘The experience of the dotcom bubble left an indelible mark on the management of tech companies’
“The whole world economy has changed,” asserts Per Lindberg, an analyst at MF Global. “We are never going to see anything like what we have done in terms of credit expansion.”
If Mr Lindberg is right, banking sector growth will be limited, and those betting that financial shares will return to their levels of two years ago are likely to be disappointed.
Different types of stocks have performed differently. Apple, a consumer stock, has outperformed IBM, which has been hurt by the sharp cuts in corporate spending.
“The financial sector was traditionally a huge buyer of technology and hardware, and so the wild card for companies that sell to businesses is when corporate spending will recover,” comments Mr Siewert.
IBM in turn has outperformed chip manufacturers such as Intel, at which it is harder to slash costs quickly. But all three have outperformed the market since the beginning of the year. Apple has risen 46 per cent, IBM 19.1 per cent and Intel 6.9 per cent.
It may be counter-intuitive for consumer stocks to perform well in the teeth of the worst recession for a generation, but experts argue that it should not come as any surprise.
“The consumer isn’t broke,” says Joe Clark, managing partner at Financial Enhancement Group. “Besides we are seeing a generation of people who see technological goods as staples rather than discretionary items. My 16-year-old daughter would say a cell phone is a need, not a want.”
In fact, the recession has benefited some companies in the software sector. Interest in the applications that can be downloaded onto Apple’s iPhones helped drive customer interest in the hardware itself, one of the main reasons the company’s revenues continue to rise.
“Customers are willing to spend a couple of hundred bucks for software or applications they will continue to enjoy,” says Mr Clark.
But some warn that the sector’s growth potential remains as uncertain as the macro-economic outlook, and that orders are unlikely to remain stable if unemployment rates surpass even the most bearish predictions.
“If you are buying tech you have to assume that the economy is going to recover at the end of this year. If you think it is not going to get better until 2010 these stocks are not such good value,” says George Kurian, an investment analyst at Tradition Capital.
But Rich Parower, managing director at J&W Seligman, counters: “The outlook over the next 12 months remains uncertain, but over a couple of years the technology sector has a good opportunity to outperform most sectors.”
Whatever the economic outlook, tech companies have one major advantage over other sectors when marketing themselves to investors: their relative simplicity.
In a world where investors have more and more things to consider before buying assets, from macro-economic growth projections to the likelihood of government intervention in the sector, technology stocks offer a relatively straight-forward opportunity.
“These companies have good cash positions, good growth exposure and perhaps most of all, clear accounting,” comments Mr Kurian. “That’s something financial stocks definitely can’t say.”
Copyright The Financial Times Limited 2009
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