PTF: Weak Dollar, Stock Buybacks Offer Hope to Tech Investors

Monday’s buybacks by Microsoft (MSFT) and Hewlett-Packard (HPQ) nudged technology back into the spotlight. Wall Street headlines have weighed heavily on equities, and some investors are looking to the technology sector for bargain-priced tech firms with the reputation and manpower to wade through the banking floodwaters. PowerShares Dynamic Technology ETF (PTF) has plodded up our PowerShares Momentum Tracker sector ranking in recent months—moving from the No. 26 position on August 6 to the No. 21 spot on September 19. As buyback plans like Microsoft’s are disseminated to weary investors, technology—and PTF—could see positive results into the holiday season.

PTF tracks the Dynamic Technology Intellidex, which seeks to include securities with the greatest capital appreciation potential. The securities selected are judged on a variety of investment merit criteria, including fundamental growth, stock valuation, investments and risk factors. As of September 23, the fund included 60 holdings divided among small-, mid- and large-cap tech companies with 44.66%, 28.7% and 26.64% allocations, respectively.

The weightings for the individual components are distributed relatively evenly, with no single component constituting more than 2.66% of PTF’s assets. This balance helps to lessen the impact that bad news from any one component has on the overall price of the ETF—a comforting feature in a smaller basket of securities. While almost half of PTF’s components are classified as small cap, tech giants such as Microsoft and IBM (IBM) are included among the fund’s top ten components.

While buybacks occur for a number of financial reasons, the latest moves by big tech could signal important price points in the sector. Microsoft announced Monday that in addition to managing the dilution that has been issued for employee stock plans, stock repurchase efforts are also timed to be “opportunistic.” Both Microsoft and H-P have said that the programs are the “normal course of business,” but along with the simultaneous hike in Microsoft’s dividend, these actions could signal a new wave of initiatives. Investors often laud buyback initiatives because they tend to increase earnings per share by reducing the number of shares outstanding.

The latest buyback program from Microsoft—PTF’s fourth-largest holding—trumps the $15 billion plan announced by PTF’s third-largest holding, International Business Machines, in February. If the federal government’s crisis control measures cost as much as proposed and the dollar weakens—as some analysts are beginning to speculate—both Microsoft and IBM could benefit. The American Electronics Association (AeA) reported September 23 that in 2007 technology exports dropped for the first time in five years. A weakening dollar could spur a reversal in this trend, boosting big tech exports and names such as IBM and Microsoft.

Buyback news could prove profitable for some of PTF’s holdings, but other recent headlines have hurt PTF components. On September 12, American Technology Research cut its rating on the semiconductor sector to “underweight” from “overweight,” citing a shift in demand for low-priced products in the handset and personal computers markets. The brokerage group noted that a slowdown in demand is creating less urgency to introduce new products—limiting semiconductor content per device. Analog Devices, Inc. (ADI)—PTF’s largest component—was included in the recent downgrade.

Since the American Technology Research cut, however, ADI has introduced two new applications to the semiconductor marketplace. On September 15, ADI announced that its SoundMAX audio processing algorithms and sound solutions would be available for next-generation HDTV. ADI also announced, on September 22, the introduction of a new audio/video microphone that aims to improve sound quality in handheld devices. ADI’s price has recovered since mid-September downgrades, with share price increasing more than 6% from September 17 to September 22.

While many of PTF’s top components are household names that trade millions of shares a day, the ETF itself has yet to garner a tremendous amount of investor interest. The average number of shares traded per day for the last three months is just over 17,000, making PTF a potentially illiquid investment. Average investors might buy or sell enough shares of PTF to feel the fund’s liquidity crunch, but it is still important for investors to be mindful of potential losses in a fire sale situation.

As various market forces affect different aspects of the technology industry, it may still be too early for many investors to purchase a sector fund like PTF. After government market initiatives solidify in the coming weeks, tech—like most sectors in the current marketplace—may be easier to value. For those investors, however, who envision a weaker dollar and increased buyback initiatives, PTF may offer a good source of diversification in the months to come.

Comments

[Roger Knights:]

I think there's a typo:
"Average investors might buy ..."
should be "Average investors might not buy ..."

2008 Sep 26 06:56 AM

[Roger Knights:]

I think there's a typo:
"Average investors might buy ..."
should be "Average investors might not buy ..."

2008 Sep 26 06:56 AM