Thursday, December 13, 2012

The Depression in Technology Stocks

Technology stocks represent 19% of the S&P 500, the largest sector weighting in the index.

If investors have bid up a group of stocks to be the most valuable in an index, you might expect that the stocks in that sector to be trading at the higher end of their valuation historic range.

But oddly that's not the case in the technology group today.

Here's what top-rated Bernstein analyst Toni Sacconaghi says about the tech stocks he follows:

While they have rebounded slightly from last year, large-cap technology stocks are still trading at nearly their lowest levels on a relative basis in 21 years and 25% lower than at the end of 2007. 

As an example of what Toni is describing, here's the price/earnings ratios of some of the largest tech hardware companies based on his 2013 earnings estimates:

EMC                               13x
Apple                              11x
IBM                                 11x
Dell                                   6x
Lexmark                            5x
Hewlett-Packard               3x

S&P 500                          12x

In other words, with the exception of EMC, every one of these tech bellwethers is trading at a discount to the S&P.

What's going on?

Toni thinks the depressed valuations reflect the market's skepticism about tech spending in 2013.  In particular, he notes that tablet sales have dramatically hurt the sales of personal computers.

In fact, in our meeting yesterday, Toni said that PC sales showed their first decline in years in the last quarter.  Although he argues that PC's are not going away, he does not expect much improvement in sales for some time.

By the way, Apple remains Toni's favorite stock.  He has an $800 price target on Apple based on his forecast that the company will earn $60 a share in calendar 2014.  He also notes that he projects that Apple will have $300 billion (!) in cash reserves in 2 years, which could allow for either significant stock buybacks or a dramatically higher dividend.

Internet pioneer and Netscape founder Marc Andreesen thinks the tech sector is in a depression, and that now might be the time to be aggressively investing in the group.  Here's how Fortune magazine reported his comments earlier this week:

Marc Andreessen, co-head of venture capital firm Andreessen Horowitz and founder of Netscape, says the slump in technology stocks is as bad as he has ever seen it. And now might be the time to buy in.

Andreessen, speaking at a conference Wednesday hosted by The New York Times' Dealbook, said that for the first time that he could remember technology companies are trading at a discount to the shares of industrial companies, which have much slower growth and tend to see their earnings swing with the economy.

In the past six months, such tech companies as Facebook (FB) and Groupon (GRPN) have seen their shares disappoint. Andreessen said that while there are some company specific issues, tech companies in the market today are generally good investments in a really bad market for tech stocks. Andreessen said that wasn't the case back in the early 2000s when the tech bubble burst. "These are big companies with a lot of cash," says Andreessen. "The public market hates technology."