A Look At The Tech Sector

My view on the overall market which can be summarized as "I don't know" has not changed. Instead I wanted to focus this morning's post on the technology sector. Technology has underperformed the broader market since mid-April for a number of reasons. The sector was over owned at the end of March, with the sector being the largest overweight for managers by far. Technology companies generate a lot of their revenue overseas which exposes them to  the strong US Dollar has and the weakening global economy. Tech companies do not generally pay large dividends and dividend paying stocks have been the investment of choice recently.

Many of the issues plaguing technology companies remain. But there  is some evidence this morning that the woes may have been priced in to the more beaten down stocks. EMC missed on EPS but is trading 6.5% higher this morning. Intel had a big miss and lowered its outlook yet the shares are looking flat. Checkpoint missed and lowered their outlook and are trading higher. Normally big misses by three tech companies would mean much lower prices.

I still believe that tech is over owned but not nearly to the extent it was a few months ago. The issue of overseas earning seems priced in as shown by this mornings reactions to poor numbers. Unfortunately, the issue of capital allocation remains. These giant cash hordes are coming into focus as a result of investors preference for dividends. In mid-April I wrote that technology was over owned and set to under perform. I now think that technology will perform more inline with the market.

2 comments:

Shubh Desai said...

What do you think about HP? It looks like a value trap but at a same time stock price is very tempting. HP is not a bad brand either.

Tsachy Mishal said...

HP is tough because they have so many different businesses. All it will take is for a couple of those businesses to do ok in order for HP to go higher because the stock is so cheap. Its a tough call. 

Printers will likely decline but its possible it stabilizes at a lower levels and continues to be profitable. Services should do fine. Software should be ok. Consumer PC is a tough business but there is no reason it should not be able to make a small profit. The same goes for enterprise hardware. There might be some sales of certain divisions they could make as well in order to focus themselves. There are a lot of businesses at HP that are changing rapidly so its a tough call.