There is one sector that hedge funds have an absolute laser focus on in this Goldilocks environment, and that is technology stocks. This is where have been pouncing at the first sign that QEII was headed our way, like a famished tiger.
Some of the highest quality names are now flaunting dividend yields greater than the 3% found on 10-year Treasury bonds. Look at Intel (NASDAQ:INTC), which is selling at a paltry 11 times earnings and a 3% dividend yield, and generates the bulk of its sales in the highest growth sectors of the global economy.
After the dotcom bust of 2000, these bad boys spent nearly a decade in the penalty box, shunned by the investing world as the poster boys for wild excess. Think Robert Downey, Jr. on steroids. During this time, cash balances doubled, free cash flows soared, outstanding shares shrank, and multiples fell to a tenth of their bubblicious peaks. Many of these stocks are now value plays.
I started recommending this group at the absolute bottom of the market last March ( click here for the call ), and it was no surprise to me when they outperformed almost every sector on the upside. With 60%-80% of their earnings coming from abroad, primarily Asia, I saw them really as foreign stocks wearing cowboy hats, pearl snap buttoned shirts, and Ray Ban aviator sunglasses.
They did not need banks, as they are almost entirely self financed, immunizing them from the credit crunch and parsimonious banks. They avoided many of the management errors that torpedoed so many other US firms, like derivatives books, leveraged real estate exposure, and LBO debt. While their American customers were getting poorer, hundreds of millions more overseas were getting richer.
The industry represents the last, best hope that America has for competing globally, as it is our only means of staying on top of the international value added chain. It seems that in addition to bulk commodities like corn, wheat, soybeans, coal, timber, aircraft, weapons, and movies, tech companies are among the few that make things foreigners want to buy.
The lessons of the bubble made them ultra conservative in their capital spending, which will lead to product shortages and much higher prices in any recovery. Memory, for example, has seen no capex at all for three years. They are surfing the wave of innovation, and will cash in big time from the mobile computing revolution, cloud computing, and the virtualization of data centers.
During the last tech bubble, the industry did not have the global market that it does today. Now, demand from the rising emerging market middle class is kicking in, as it is for commodities. The 20 month tech rally we saw from the 2009 lows could just be the down payment of a decade long bull market in these stocks, which will end with another bubble.
When John Chambers, a first class manager, discussed Cisco’s (NASDAQ:CSCO) outlook after announcing blowout earnings, he was so effusive he sounded like he was on ecstasy. Take a look at IBM (NYSE:IBM), Juniper Networks (NYSE:JNPR), JDS Uniphase (JDSU), Sandisk (SNDK), Micron Technology (NASDAQ:MU), and lithography toolmaker (NASDAQ:ASML). Long dated call spreads in any of these make sense on a decent dip. You can also look at the Technology Select Sector SPDR (NYSEARCA:XLK), the PowerShares QQQ (QQQQ), or the leveraged ProShares Ultra Technology (NYSEARCA:ROM).