As tech sector goes for an upgrade, it is time to invest
CHICAGO (Reuters) - Despite the drama concerning U.S. agencies potentially dimming lights due to the sequester saga, global companies are brightening the scenario for technology purchasing. That could spark a turnaround in the sluggish sector.
Telecommunication services and information technology are laggards in the U.S. stock market's current bull rally, up only 3.6 percent and 2 percent year-to-date, respectively, through February 22. That compares with a 6.6 percent rise for the broader S&P 500 Index.
This contrasts with consumer staples and discretionary items, which are up more than 9 percent and 5.8 percent, respectively, according to S&P. This reflects widespread optimism that consumer spending will return.
But there are signs that the beleaguered tech sector is about to be bolstered. Companies from service providers to manufacturers are starting to ramp up their information technology (IT) spending, which is a clear sign that economic confidence is in vogue and a business cycle is on the upswing. As more employees than ever are working from home or on the road, companies are updating their "fleet" of company-provided communications devices and data services.
The largest segment of IT spending, according to research firm Gartner Inc, will be in global telecom, which includes mobile data and voice services. IT services and devices - PCs, tablets, phones and printers - are next on the spending priority list. Although telecom service spending is forecast to rise only 2.4 percent this year, enterprise software and device purchases are expected to climb more than 6 percent each.
Despite myriad economic difficulties around the world, information technology spending worldwide posted record annual growth of nearly 6 percent last year, according to the International Data Corporation. Spending on smartphones in 2012 exceeded PCs for the first time, reaching almost $300 billion, while PC spending declined to $233 billion, IDC reported. That trend is expected to continue this year.
The last major wave of tech spending occurred prior to 2000. The sector would have been due for another cycle of capital spending by 2008, but it was delayed because of the financial meltdown. While spending might not be as robust as during the run-up to 2000, this cycle could be broad-based and focused on a wide range of products and services.
Worldwide information technology spending is forecast to climb 4.2 percent from 2012 levels, according to the Gartner Group. A Thomson Reuters survey released on February 22 found that S&P 500 firms' spending plans are exceeding analysts' estimates. That translates into more capital expenditures. The bulk of the tech spending, Gartner forecasts, will be directed at enterprise software, information technology services and devices.
Investors need to pay attention because tech companies have a long way to go before they are seen as overvalued. They also have yet to be classified as a genuine comeback sector like financials, which are up nearly 8 percent this year, although that may change this year as more buying shifts to technology.
A hidden benefit to owning technology stocks right now is that many of the leaders in this sector are swimming in cash and are beginning to pay dividends. Apple Inc, for one, is down 35 percent from its September peak through Thursday, but is sitting on a $137 billion cash hoard and paid its first dividend last year.
WHERE TO INVEST
Investors do best with balanced portfolios that spread investments broadly across a sector or index. But with tech funds, this is tricky because most have large concentrations in Apple, which still has more downside risk as it faces stiffer competition in the phone and tablet lines from Android-based products from Samsung Electronics Co Ltd and others.
Here are some ETFs that fit the bill for either broad or focused investments in the sector:
- Guggenheim S&P 500 Equal Weighted Technology ETF
Unlike most capitalization-weighted indexes that load up on the most popular - and overvalued - stocks, this fund reduces individual holdings to under 2 percent per stock. It includes leading hardware companies like Western Digital Corp and Seagate Technology Plc and software giant Symantec Corp. As a result, it is outperforming the general sector and is up 6 percent year-to-date through January 30.
- First Trust Dow Jones Internet Index
For a more specialized play that focuses on online companies, this fund covers a smaller slice of the tech sector. Internet mainstays including Google Inc, Amazon.com Inc and Yahoo Inc are all represented. This is a worthy consideration if you are banking on the trend that online retailers and advertising will continue to take business from the bricks-and-mortar world. The fund is up nearly 9 percent year-to-date.
- T. Rowe Price Science & Technology Fund
An actively managed fund that is up 5 percent year-to-date, science and technology offers a diverse mix ranging from the Chinese Internet firm Baidu Inc to the game company Nintendo Co Ltd.
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