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For more than six months, the high-technology sector has been on a strong rebound, with Oracle (ORCL), Hewlett-Packard (HPQ), Cisco Systems (CSCO), and Alcatel-Lucent (ALU) gaining anywhere from 10 to 40 percent. This morning, however, the rebound is put into question following a disappointing earnings report from Oracle.


(Click to enlarge)

Company

Forward PE

Operating Margin

Qtrly Revenue Growth (yoy)

Qtrly Earnings Growth (yoy)

Oracle

10.94

38.49%

-1.6%

17.7%

Cisco

9.91

22.68

5

44

Alcatel-Lucent

143

0.88

-1.30

--

Hewlett-Packard

6.33

7.93

-5.60

-16.10

To be fair, part of Oracle's problem seems to be company specific, as its sales force failed to close on a number of big deals, perhaps, because customers postponed purchases waiting for new product releases.

But Oracle's problems could be attributed to another factor: Its customers -- large corporations and government agencies -- are reluctant to open their wallets and buy new software, feeling the pinch of a slow-growing world economy. Oracle's revenues dropped by 1.0 percent (yoy) and 1.6 percent sequentially. Of particular concern is a decline in new software licenses (-1.5%), and in hardware sales (-16% yoy and 6.1% sequentially)-the decline was extended throughout most of the world regions, which is consistent with reports from other U.S. multinationals. Yesterday, for instance, Federal Express (FDX) and Caterpillar (CAT) reported big sales, misses too. What does all this mean for high-tech investors? What should they do with high-tech stocks?

Two things: First, they should keep a close eye on the big picture, the world economy that continues to blow headwinds even for bellwether companies. Second, they should keep an eye on the small picture, and most notably the valuations of different technology companies. Oracle, for instance, trades at a forward PE of roughly 10, with a 0.73 companies -- not bad in this slow interest environment.

Source: Is Momentum Shifting For High Techs?