The First Trust NASDAQ Technology Dividend Index Fund is an exchange-traded fund. The Fund seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the NASDAQ Technology Dividend IndexSM (the “Index”).
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While broader equity markets are only seeing modest declines, tech stocks aren't so lucky. The Nasdaq-100 (QQQ -0.8%) had its lowest print since October this morning before recovering slightly.
Chinese tech stocks (KWEB -4.3%), including 2013 solar high-flyers (TAN -4.2%), are especially hard-hit following a Shanghai selloff triggered by PBOC withdrawals. Other Internet (PNQI -2.3%) and social media (SOCL -2%) stocks aren't faring much better.
Will earnings season come to the rescue? Intel and Yahoo report after the bell today, and Google and IBM after the bell tomorrow.
Only 5 of the 10 largest tech companies by market cap were on 2000's top-10 list, notes VC Matt McIlwain in a column highlighting the risks posed to tech investors betting heavily on IT giants.
McIlwain also observes 7 "big tech" names - IBM, H-P, EMC, Oracle, Cisco, Microsoft, and Intel - have collectively seen nearly flat sales/profit growth over the last two years. Recent industry sales figures - PCs, servers, storage - help explain why.
He argues recent trends - the mobile transition, the rise of subscription-based cloud apps, the migration of workloads to cloud infrastructures - makes him "a doubter in aggregate future value creation for current Big Tech companies."
The business model changes caused by the cloud shift, and a general pickup in the pace of change, especially worry him. Sales policies need to be overhauled to deal with subscription pricing; traditional "account control" is undermined as decisions shift from CIOs to individual departments; and companies with tens of thousands of employees have a harder time quickly reacting to change than smaller firms.
The First Trust High Income ETF (FTHI) and Low Beta Income ETF (FTLB) will use index options as a complement to its equity holdings.
The Nasdaq Rising Dividend Achievers ETF (RDVY) tracks an index of 50 companies with a history of raising payouts, and "that exhibit the characteristics to potentially continue doing so in the future."
Nasdaq indices are used in a number of well-followed dividend ETFs such as PowerShares' High Yield Dividend Achievers Portfolio (PEY) and PowerShares' Dividend Achievers Portfolio (PFM).
For its part, FirstTrust's other dividend ETFs include the Nasdaq Technology Index Fund (TDIV) and the Value Line Dividend Index Fund (FVD).
Nasdaq-100 (QQQ) futures +0.9% AH after Microsoft handily beats FQ1 estimates on the back of solid enterprise software licensing growth and smaller-than-feared Windows declines, and Amazon beat Q3 revenue estimates while providing broad Q4 guidance ranges.
Intel (INTC) +1.4% in response to Microsoft's numbers.
"I do worry a little bit that we're beginning to hear things that are reminiscent of the 1999-2000 period—the number of hits, the number of eyeballs," says UBS' Art Cashin, suggesting a new tech bubble is afoot.
Cashin doesn't claim all tech names are taking part - many large-caps still go for less than 15x trailing EPS and 3x sales - just some of those with strong cloud and/or mobile exposure. "We're beginning to see a case of old tech/new tech."
Though using P/Es to value growth-stage tech firms can be tricky, given how near-term earnings are often depressed by big investments, a look at price/sales multiples makes it clear valuations for many high-growth names have soared.
Facebook (FB), LinkedIn (LNKD), Zillow (Z) and YELP now respectively trade at 13.4x, 13.1x, 10.9x, and 14.8x 2014E sales. The story is similar for some enterprise-focused names: Workday (WDAY) and Splunk (SPLK) go for 20.7x and 17.3x FY15E (ends Jan. '15) sales, and ServiceNow (NOW), Tableau (DATA), and FireEye (FEYE) go for 11.9x, 14.4x, and 21.4x 2014E sales.
Price/billings ratios for enterprise firms that depend heavily on cloud subscriptions are a bit lower than price/sales ratios, but are still often in the double-digit range.
A number of big cap tech companies have fooled this generation of analysts, says Jim Chanos (about minute 11 of the video), by acquiring their way into growth as organic expansion grinds to a halt. He won't name names (HPQ is already trodden ground), but Cory Johnson's mentioning of IBM and 3D Systems (DDD) as fitting the bill has Chanos nodding his head, "Acquisitions are a way of capitalizing R&D."
"I'm very leery of tech companies that become value stocks," he says, partly explaining the reason for exiting another long - his stake in Microsoft (MSFT). Apple (AAPL)? He considers it more a consumer products stock than tech stock, and believes the company is still innovating.
Techs outperform today with the Technology SPDR ETF (XLK +0.7%) rising to its best level in more than 12 years behind Carl Icahn's disclosure of a stake in Apple and his urging for another boost to the company's share repurchase plan.
The QQQ's are ahead 0.6% vs. a 0.35% gain for the S&P 500.
"Sell in May and go into cyclicals," says Ralph Acampora after the last month. He reminds of an old adage saying sectors going down the least during a selloff become the new market leaders. During SPY's 5.2% decline from May 22-June 6, the best performers were Tech (XLK) and Industrials (XLI). The worst were Telecommunications (IYZ) and Utilities (XLU). This "rolling rotation" between sectors is necessary, he says, to give further life to the secular bull market begun in March 2009.
"Tech (XLK, QQQ) is where cash goes to die," says Bill Smead as research shows massively over-capitalized companies don't perform any better than undercapitalized ones. "There's not enough tension - you don't make very good decisions what to with cash when you've got too much of it - unless you're Warren Buffett." Example #1 is Microsoft (MSFT): "They've probably lost more money in the last 13 years in the online business than any single corporation ... in history."
Thomas Lee lifts his year-end S&P 500 (SPY) forecast to 1,715 from 1,580 as the bull has already outrun his expectations. His team sees clues economic performance is picking up, including the outperformance of semiconductors (XSD) vs. transports (IYT), and the steepening of the 10 year/30 year Treasury curve. Risk/reward is particularly appealing in tech (XLK), healthcare (XLV), and financials (XLF).
"Which has a higher P/E - Procter & Gamble (PG) or Google (GOOG)," asks the WSJ's Tom Lauricella. Enthusiasm for anything with yield has driven the P-E ratios of dividend payers (DVY) like P&G maybe way too high. Techs (XLK) with double-digit earnings growth, no debt, and massive cash balances trade at 12x, says MFS' James Swanson, while a utility (XLU) in Ohio is at 16x. "How far do you go with this game?" "Pretty far," says Templeton's Donald Taylor. "The macro environment (causing this) is not at all likely to change anytime soon."
The beginning of a bigger move? Two of the year's three strongest performing sectors - healthcare (XLV) and consumer staples (XLP) - are down on the week as the three weakest sectors - energy (XLE), materials (XLB), and tech (XLK) - post gains of 3%-4.5%.
The pace at which new technologies are disrupting companies makes it dangerous to be a value investor, argues VC Ashvin Bachireddy. As mobile devices, cloud software, e-commerce, and much else upends old business models, investing in a BlackBerry or an OfficeMax/Office Depot due to a low P/E can prove painful. "While there may still be opportunities for value investing, you need to be cautious of businesses that appear to be on a slow decline." His remarks seem prescient in light of what happened today to several PC-related names with low multiples.
Gartner forecasts global IT spending will grow 4.1% this year to $3.8T; that represents a pickup from 2012's 2.1% growth. Hardware is expected to grow 8% to $718B as mobile strength offsets PC/printer weakness, and enterprise software 6.4% to $297B. Gartner: "The global steady growth rates are a calm ocean that hides turbulent currents beneath ... there are clear winners and losers over the next three to five years, as we see more of a transition from PCs to mobile phones, from servers to storage, from licensed software to cloud, or the shift in voice and data connections from fixed to mobile."