By John Wasik
CHICAGO, March 1 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
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
Feb. 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 Feb. 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
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 Jan. 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
- 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.