Time to Start Buying Dips in the Technology Sector

Fears of a slowdown in the U.S economy have pummeled the shares of leading technology companies. Cisco (CSCO), Apple (APPL), Google (GOOG), Intel (INTC) and Microsoft (MSFT) are trading significantly below (25-40%) their highs reached a few months ago. A number of these stocks had done exceedingly well during 2007 so some of the pullback is expected. However, the market has been very unforgiving about slower forecasts.

In the age of SOX, you expect CEOs to be very cautious about any future predictions. Further, when the air-waves are full of doom and gloom prognostics about a recession, CEOs can not go out and claim that everything is rosy. However, the market reaction is overdone.

Even in an economic slowdown, companies continue to invest in technology. This is because technology investments have a strong correlation with growth in productivity and companies cannot get behind the curve for too long. Further, in spite of the economic slowdown, corporate balance-sheets are still looking good.

The other big factor is that the technology companies have get a lot of their revenues from emerging markets. And these segments are growing faster than ever. Cisco reported 24% growth in orders from emerging markets for the second quarter. Though this number is smaller than the 35% growth reported in the first quarter, it is still a good number for a company as large as Cisco.

It is also clear that in this election year, Congress and the White House will try their best to stimulate the economy. The question is not whether they will act but how big the stimulus package will be. Efforts are also underway to shore-up the financial system and the Fed has finally realized that they were behind the curve and is aggressively cutting rates. Lower interest rates, higher confirming loan limits and programs to help distressed home owners will help cushion the effect of the negative HPA (Home Price Appreciation). So any recession in the U.S economy is going to be short.

A lot of investors still have painful memories of the burst of the technology bubble earlier in this decade. However, the valuations then were astronomically high and bear little resemblence to the current situation. It is time to start buying the dips in the technology sector. The valuations are compelling and the prognosis sounds much worse than it actually is.

Disclosure: Author holds positions in the above-mentioned securities

Comments

[bluebox]

From your keyboard to the big institutional elephant's ears.

Unfortunately, I don't think they'll be listening any time soon.

[Bob TheTrader]

Wall Street is ran by a bunch of overreacting buffoons. The market goes up or down at their whims and fears, forget the fundamentals, let's just run around like chicken little because the sky is falling. Well at least chicken little has a real reason, what's your lame excuse, wall street?

[Bob TheTrader]

All responsible financial institutions preach about market unpredictability and hence the need to focus on long term investment goals via asset allocation. They also preach about looking at the fundamentals while deciding who/what to invest it. However I am convinced that the market unpredictability is driven by wall street expectations and fundamentals are just part of the equation but hardly the key driver in the market movements. Is it just me that thinks this?

[Amidwesternneighbor]

I agree that the sector is oversold. However, I do *not* agree that the recession will be short (less than 1 year) or that its effects will be minimized by the moves you mention. For starters, the very emerging market growth you mention as helpful to global companies, will also be what keeps the U.S. from recovering quickly...because it means that commodities will continue to rise in demand, with the effect being inflationary. We just saw that today with the commodities and energy markets. And we've been hearing from Regional Fed heads the last week about how they may be constrained from much more in the way of rate cuts. What we are facing is stagflation...and that cannot resolve in a matter of months, particularly with the bottom of the housing and credit iceberg still to be exposed. We are looking at 18 to 30 months before we resume normal growth of GDP > 2% for 2 consecutive quarters.

[Walt17]

You state that "Even in an economic slowdown, companies continue to invest in technology." Perhaps I misunderstood, but my impression was that Cisco's CEO subtly suggested that companies may reduce investing in technology. Tech may be oversold, but oversold can become way oversold. I'm not inclined to bet on a turnaround yet. I'd rather get to the party a bit late, than too early.