Tech Stocks to Lead the New Bull Market Higher

Since the market correction started in November 2007, Tech stocks have been hit really hard as investors sold everything they own, the good and the bad. The Nasdaq composite was down about 25% when it hit bottom a month ago, while the S&P 500 was down about 20%. If you look at the market leaders before the correction, Google (GOOG) and Apple (AAPL) were both down more than 40% from their October highs.

The reason behind selling tech stocks was that the financial crisis will lead to slower IT spending by the Banks and Brokers, and a consumer led recession will result in slower tech sales. Six months later, those same big tech companies reported earnings for the first quarter and they easily beat wall street expectations. So why were analysts estimates so low for the tech sector?

In GOOG's case, revenues for the first quarter were 42% higher than a year ago, and they beat analysts earnings expectations by 7%. It turned out that the data on paid clicks that all analysts base their numbers on was seriously flawed and they all blamed their bad estimates on the firm that provides these statistics. As for AAPL, revenues were also around 43% higher, and earnings beat expectations by 8.4%. It was the incredible number of Mac computers sold that boosted AAPL revenues. Analysts realized that even during a recession people are willing to spend some money to get AAPL’s cool products. Both companies also benefited from strong international sales.

Even if you look at other big cap tech names like IBM (IBM) or Amazon (AMZN), they reported very strong numbers that nobody on the street was expecting. Some of them even guided higher for the remainder of the year. But can these growth rates be maintained in the foreseeable future? Well, if with all the problems that hit the US economy in the first three month of the year they can report such numbers, it is highly unlikely that things will slow down in the second half when it is seasonally the best time for tech companies to sell their products. In addition, the US economy is now supposed to be getting better with all the Fed and Government bailout plans.

In addition to looking at the fundamentals, we also like to check the Technicals. Both GOOG and AAPL broke out from sound bases and are now back above their 50-day moving average.

GOOG broke out and gapped higher on strong volume the day after releasing its earnings report. Its relative strength is making new highs already. This is very bullish for the stock going forward. You can also look at the QQQQ chart which tracks the Nasdaq 100 index to get a more general picture. It bottomed at around $41 in March and is now trading at $47, around 15% higher. RSI is also making new highs.

Given both strong fundamentals and technicals, we believe that the Tech sector will outperform the overall markets for the remainder of the year and will be leading the markets higher going forward. If you would like to take advantage of these moves without being exposed to only one specific stock, you can invest in the Nasdaq 100 ETF (QQQQ), or if you can handle more risk you can buy the Ultra QQQ ProShares ETF (QLD). With the recent run up of all the stocks mentioned here, you might want to wait for a pullback before investing your money.

Disclosure: Author currently owns GOOG and AAPL through mutual funds in his personal account.

Comments

[User 143167:]

Tech is selling on "global decoupling story". The most ridiculous part of that story is that no one on this globe except the US investors actually believe it.
However, for anyone who really believe it, you should buy more global growth stocks with much higher growth potentials and lower valuations, IF decoupling is really the deal.

2008 Apr 29 06:45 AM

[thomas728:]

Mr. Azar gives too much credit to the investor as to
assume that any "thinking" by the investor went into
the process.

Would it not be grand if the daily volume were delineated
by who was responsible for sell trading: Hedge Funds, Margin
Calls, Mutual Funds, Option Players, etc., etc.

Were that information available the data would aid immensly
those who believe in the long term merits of their holdings,
especially the high volume stocks we see at the top of the
daily action.

Then again, that scenario would effect those of sound mind
from scooping up the over-sold.......and that is one wonderful
way of beating the knot heads while adding on a "Fire Sale"
price.

The cases cited are a wonderful example and in my case I
was delighted to pick up SGP after the knee jerk sell off.

I have used that selection process to add, without trepidation,
and I'm off to the next one.

This missive is not about me but something for the Alpha
Community to explore and make life a bit easier in what
seems to be a senseless process at times.

2008 Apr 29 07:14 AM

[hook:]

news to me that amazon is a tech stock, or google for that matter. why not site the run up in walmart as well to prove your thesis

2008 Apr 29 07:38 AM

[tom1234:]

Hook---too funny but true --it is news to me also---i keep asking ---last oct 07 aapl was $200.00 --since then more products both in and out of the pipeline plus greater increase in earnings and no debt that is DEBT FREE apple making a greater value than oct07 --should $200.00 per share be a number on the way to $$$$$$ and when will this be recognized

2008 Apr 29 08:13 AM

[SeekingAlph...:]

On March 7th I thought, iPhones are cool, I want one and aapl is trading at 110.00. Do I sink 400.00 into an iPhone? Or do I sink 400.00 into appl stock? I bought 4 shares. When it hits 200.00 I'll sell, buy my iPhone and get my money back!

2008 Apr 29 02:35 PM

[engineer1:]

Re spell check -- Not everyone is an English major. JJ

2008 Apr 29 09:50 PM

[imacademic:]

Marc, Are you currently on the West or East Coast? I would prefer to read what you have to say than The M.F. My intuition and love of Apple products, as well as my adoration and admirmation of Jobs has made Laurie rich once again. It takes me back to the late 70's, fresh out of college, when I felt similarly about
Les Wexner and The Limited. I 'm very into technology and have inherited my dad's portfolio of well
performing "dinosaur stocks." I need someone more assertive to guide me in my sometimes dubious and risky trading. I recently discovered Alpha and I just love to watch my portfolio in action. I also believed in Mackey and Whole Foods until his shenanigans were revealed. Please let me hear from you soon. Thanks. Laurie Siegel, NYC.

2008 Apr 30 12:45 AM

[brewer:]

Apple is a great company that most stock traders obviously don't understand. Sure, it's volatile, but even in the panic of January, it didn't go less than twice what it was about a year earlier. What a lot of people fail to recognize is that in the fall, it was up virtually every day of trading. It was ripe for a sell off, but it's mostly back now.

They passed IBM and Dell last year, MSFT will be passed once it gets low enough, beleaguered enough... then Apple will start a clone program with desperate vendors, like Dell and HP, trappped in MSFT quagmire, and the rest will be history.

2008 Apr 30 01:07 AM

[Marc Azar:]

Laurie, I am currently on the West Coast. Please visit my website and you can read more of my commentary on the markets. You can also contact me directly by going to the 'Contact Us' page on my site.

2008 Apr 30 01:05 PM

[letsmith:]

Mr. Azar as always very assertive in his recommendations.

2008 Apr 30 01:10 PM