Resilient Tech Shares Downshift In 2016

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Includes: AAPL, AMZN, FB, GOOG, GOOGL, IBM, MSFT, NFLX, NTNX, QQQ
by: Financial Markets Wizard

Summary

Despite the recent downshift in technology stocks, tech companies are unlikely to lose their appeal anytime soon.

With the exception of a few volatile corners, such as social media, cloud computing and 3D printing, the recent drop in technology shares has been a measured one.

With the US stock market eyeing a strong bounce in February, the downturn may already be nearing its end.

Technology stocks proved resilient in 2015, outperforming a volatile market that ended the year in negative territory for the first time 2008. The technology-heavy Nasdaq Composite Index finished 2015 up 5.7% on its way to its fourth consecutive annual gain. By comparison, both the S&P 500 and Dow Jones Industrial Average saw their first annual loss since the financial crisis. Even within the S&P 500, technology shares outperformed the broader market average. The S&P's information technology component rose 5.6%, outpacing the majority of sectors including financials, industrials and energy.

However, the early part of 2016 has not been kind to the technology sector, which has fallen in lockstep with the broader financial market in the wake of global growth woes and rapidly declining oil prices. For 2016, information technology shares were down more than 8% as of mid-February.

The extent of the "tech wreck" may have been exaggerated through the first six weeks of the year. With names like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), IBM (NYSE:IBM), Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN), the industry as a whole seems to be in good standing, provided they can drive growth innovative ideas and consumer-focused products. By most accounts, these bellwethers are expected to carry the sector forward in 2016.

Technology shares have done a great job outperforming the market over the years because they are tied to consumer spending. In a low-yield environment with plenty of global headwinds, many advisers have told their clients to focus on the US market, which is experiencing relative stability and economic growth when compared to the rest of the globe. The fact that consumers have embraced technology in every facet of life is all the more reason to trust this advice.

The numbers certainly don't lie. As you can imagine, 2015 was a down year for technology stocks when compared with their long-term performance. The Nasdaq 100, which is considered even more technology heavy than the broader Nasdaq for its exclusion of financial companies, has gained more than 120% over the past five years and more than 200% over the last 10 years.

The Nasdaq biotechnology index, which includes companies at the intersection of life sciences, pharmaceuticals and technology, has spiked around 270% over the past five years and more than 350% over the past ten. That's because biotechnology is "one of the strangest, scariest, sexiest and most interesting corners of the stock market" that has tremendous upside despite more risk.

The fact that the technology industry has a multitude of core names in addition to a plethora of dynamic up-and-comers gives investors a great deal of choice in this arena. One area that investors need to be weary of is the IPO market. The relative tech market cool down this winter has undermined what was supposed to be a strong IPO from cloud computing company Nutanix (NASDAQ:NTNX). However, so far the company hasn't been able to generate much interest. According to an attorney for Cooley LLP, a law firm headquartered in the heart of Silicon Valley, there are about five $1 billion-plus technology IPOs that are "stalled out" due to recent headwinds.

Tech IPOs spiked to more than 50 in 2014 before catering at around half those levels last year. The proceeds raised fell from more than $35 billion in 2014 to less than $5 billion last year, according to data from Reuters. IPO advisers have warned companies not to go public amid heightened volatility. According to them, a CBOE Volatility Index above 20 (the historical average) is a sure sign to stay away from launching an initial public offering. The Volatility Index, also known as the "investor fear gauge," has spent nearly all of 2016 above 20, having peaked at 28.14 on February 11.

Despite the recent downshift in technology stocks, tech companies are unlikely to lose their appeal anytime soon. With the exception of a few volatile corners in the market, such as social media, cloud computing and 3D printing, the recent drop in technology shares has been a measured one. With the US stock market eyeing a strong bounce in February, the downturn may already be nearing its end.