Funds: IT bargains in a pricey sector
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Jody Clarke Oct 30, 2009
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The Nasdaq is up sharply this year. But given that the tech-heavy index now trades on an average forward p/e of 25 against 17 for the rest of the market, are tech stocks looking a bit overheated?
Not necessarily. First off, the Nasdaq isn't the tech-heavy index that it was ten years ago. Of the 3,600 firms the index tracks, 31% are industrials. These include non-tech stocks such as Sears, the mega retailer, on a heady p/e of 55. Meanwhile, some true tech stocks are much cheaper. Microsoft, for example, which is currently reporting strong sales of the new Windows 7 operating system, trades on a more modest forward p/e of 16.
Next, although stalwarts such as Nokia and IBM are struggling to deliver growth, firms involved in new technologies, such as cloud computing and delivering broadband applications, should do well even as the global economy stays weak, says Nick Evans, managers of the Polar Capital technology fund.
He cites Aruba Networks, a broadband internet provider, as an example. "There are some really strong product cycles and it's the small and mid-cap emerging technology plays that will do well." Aruba reported an earnings increase of 10.5% for the quarter to 31 July 2009.
And remember, just ten years ago technology such as video conferencing was a "joke", adds Jeremy Gleeson of AXA Framlington. Yet today, companies such as Polycom and Tandburg are helping firms cut costs as cheap broadband makes the technology more usable.
However, these success stories can't hide the bigger picture. IT spending is down in 2009, according to Gartner, while technology research firm IDC predicts that global PC sales in 2009 will be flat at best.
Although tech stocks may not be trading at the mad multiples of 1999 and early 2000, many nevertheless look frothy. Some analysts expect Google and Apple, for example, to deliver heady 15%-20% revenue growth next year.
So, although the technology sector looks good long-term, many IT stocks are no longer cheap. However, tech-focused investment trusts still offer some value. RCM Technology Trust (tel: 0800-317573), up 31% over one year, is trading on a discount of 9.5% to net asset value. Meanwhile, the Polar Capital Trust (020-7227 2700), up 68%, boasts a discount of 10%.
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