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07-03-2012 20:06:00

Tech Stocks Have Been Red Hot, But Bulls Still Take The Long View

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-- Information technology stocks, led by Apple, are the 2012 rally's best performers

-- Investors are doubling-down on future growth, citing cloud computing, handheld devices

-- Nasdaq composite P/E valuation higher than broader market, but sector is cheap by other metrics

By Chris Dieterich and Alexandra Scaggs


NEW YORK -(Dow Jones)- Technology stocks have been atop the crest of the recent stock rally, and investors say they're still keen on the sector's long-term growth trends.

The fingerprints of technology stocks are all over the equity market's substantial gains. The tech-heavy Nasdaq Composite is off to its best start to any year since 2000, and last week briefly rose above 3000 for the first time since the dot-com bubble began its spectacular burst in late 2000. Tech stocks are this year's best performing sector in the Standard and Poor's 500-stock index, up 13%, compared with a 6.8% gain in the broader market.

Recent tech-stock outperformance has been stoked by a series of strong fourth-quarter earnings reports delivered by the sector's marquee names.

Technology companies topped all other sectors last quarter with 17% quarterly earnings growth, according to S&P Capital IQ. Revenue growth estimates for technology stocks was 16%, second only to the energy sector, which came in at 20%.

"Large-cap technology stocks have exceeded our expectations with better revenues, earnings, margins and cash flows. You just can't find that elsewhere in the large-cap growth space," said Michael Sansoterra, a sub-advisor for the Ridgeworth Large Cap Growth Fund in Atlanta.

Of course, a large chunk of last quarter's earnings and sales gains were driven by a single high-flyer: Apple Inc. (AAPL). In January, the Cupertino, Calif., company posted one of the most profitable quarters ever for a U.S. corporation, pulling in $13 billion in earnings, driven by sales of iPads and iPhones. Apple shares have climbed 70%, or $220 a share, since the middle of June.

Apple, the world's largest company by market capitalization at roughly $500 billion, has contributed mightily to the sector's recent gains. Apple's daily stock moves carry more weight than each of the utility, materials and telecommunication sectors on the S&P 500. It's also nearly as large as General Electric Co. (GE), AT&T Inc. (T) and Coca-Cola Co. (KO) combined.

But Apple hasn't been everything to the sector. While other industry bellwethers including Intel Corp. (INTC), International Business Machines Corp. (IBM) and Microsoft Corp. (MSFT) each reported slower revenue growth last quarter, their shares have soared over the last year. IBM is up 24%, and Intel up 25%, over the last 12 months. Microsoft has zoomed 24% higher over the last three months alone.

Even as share prices climb, investors continue to latch on to long-term demand trends expected to pave the way for additional future stock gains.

Among these shifts is consumer adoption of mobile devices--such as tablets and smartphones--at the expense of personal computers. Another is the movement in centrally stored and accessed data, or the so-called "cloud." The term is a catch-all for the trend to move data storage away from PCs, a change likely to attract increased capital spending from businesses.

Apple is right at the nexus of these trends. Wednesday, Chief Executive Tim Cook announced that more than 55 million iPads have been sold since the product's 2010 launch, adding that more than 100 tablets were introduced by competitors in 2011 alone. The company has picked up 100 million customers for its iCloud service since its introduction in October 2011.

"We are looking at another technology boom in handheld devices," said Randy Bateman, chief investment officer at Huntington Asset Advisors. "This second tech boom may never be as big as the first one, but certainly everyone in the world wants to be a part of it."

From a valuation standpoint, the Nasdaq is a bit richer than the broader market for investors who gauge market valuation by corporate earnings and share prices, calculated by dividing a company's stock price by average annual corporate per-share earnings.

As of Tuesday, the Nasdaq's price-to-earnings ratio stood at 16.60 on a trailing-12 month basis. For the same measure of the Standard & Poor's 500-stock index, the measure was 13.95. Still, relative to the frothy expectations in the early 2000s, tech stocks look relatively cheap. In 2003, the Nasdaq's P/E ratio was over 30, according to FactSet Research, while the S&P 500 ratio for the same period was about 20.

"I think you're paying a more modest premium for more accelerated growth," said Mark Lehmann, president of JMP Securities. "[The Nasdaq's valuation] is above the S&P's but you're dealing with companies growing more rapidly. "You could argue with more technology: it's more volatile, but it's also got to be a little richer premium."

For 2012, at least, valuation for tech is actually lower than for the broader market. The P/E ratio based on earnings expected this year for the S&P 500 comes in at 13, and the S&P tech sector is just below that, at 12.92.

And the sector also looks cheap by other metrics. Equity strategists at Goldman Sachs Group Inc. (GS) contend the sector is well below average in terms of market expectations for earnings growth over the next five years.

"Information technology currently appears to be the most undervalued sector," wrote Goldman's chief equity strategist David Kostin last week in a note to clients.

Chris Dieterich, Dow Jones Newswires; 212-416-2611; christopher.dieterich@dowjones.com

--Christian Berthelsen and Kaitlyn Kiernan contributed to this article.

(END) Dow Jones Newswires

March 07, 2012 15:06 ET (20:06 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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