Money Managers Expect Muted Year-end Tech Rally
NEW YORK (Reuters) - As investors exchange their beach wear for business suits at the end of summer every year, they usually prepare for a rally in technology stocks in the run-up to the December gadget spending spree.
But this year, with high energy and food prices, the housing slump and credit market crisis muting consumer demand, Wall Street is bracing for a subdued performance from the technology industry even during its busiest manufacturing season.
Dell Inc (DELL.O: Quote, Profile, Research, Stock Buzz), the world's No. 2 maker of personal computers, sounded a warning bell on Thursday when it reported a sharper-than-expected drop in quarterly profit and said cutbacks in U.S. spending were spreading to other countries.
While analysts say the results reflect weaknesses in Dell as much as in the broader industry, even the most bullish forecasts call for only a 10 percent to 15 percent rise in technology stocks this fall -- which would barely take the sector back to where it was at the start of 2008.
"The tech rally into the back half of the year will probably be more muted than other years," said Jim Grossman, an analyst for Thrivent Asset Management, which manages $73.2 billion of investments.
However, if holiday sales outpace the worst expectations, investors would revisit the sector since the shares already reflect deep pessimism, he said.
The S&P Information Technology 45 index has fallen about 13 percent so far this year and the Merrill Lynch Technology 100 index has lost about 14 percent.
Tech stocks in the S&P 500 index are trading at about 16 times estimates of earnings for the next 12 months, compared with almost a multiple of 19 this time last year, according to Thomson Reuters Proprietary Research.
Kevin Landis, chief investment officer of Firsthand Capital Management, which manages about $600 million worth of investments, said high-growth tech firms will look cheap when the economy starts to improve. "What could be better than buying growth stocks at a no-growth multiple?" he said.
Landis likes the growth prospects of solar technology companies, such as SunPower Corp (SPWR.O: Quote, Profile, Research, Stock Buzz), and cell phone makers like Nokia (NOK1V.HE: Quote, Profile, Research, Stock Buzz) and Apple Inc (AAPL.O: Quote, Profile, Research, Stock Buzz).
Even the most optimistic money managers say investors should not make risky bets, and instead recommended safe blue chips such as Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz), IBM (IBM.N: Quote, Profile, Research, Stock Buzz) and Cisco Systems Inc (CSCO.O: Quote, Profile, Research, Stock Buzz) until there is clear evidence of an economic recovery.
"I don't think this is a market where you get paid to be a hero," said Bernard McGinn, president of McGinn Investment Management Inc, who manages $55 million of investments including Hewlett-Packard Co (HPQ.N: Quote, Profile, Research, Stock Buzz) and Nokia and expects a 10 percent to 15 percent tech share rally this year.
Some investors were concerned about the strengthening dollar, which may boost the U.S. economy but crimp overseas sales that have largely been strong for the tech sector.
"The problem will be if our dollar starts rising and the economy does not rally. I do think there's a danger of that happening," said Keith Springer, president of Capital Financial Advisory Services, who manages about $60 million of investments mostly for individuals. He likes Oracle Corp (ORCL.O: Quote, Profile, Research, Stock Buzz) and Microsoft but notes that nobody is immune to a bad market.
The weak economy already weighed on the tech sector last year, with the S&P Tech 45 index rising only 5 percent in the last four months of 2007 compared with a 10 percent rise over the same period in 2006.
Some fund managers who expect inflation to ease and housing prices to stabilize say that even early indicators of a recovery in 2009 would make consumers and companies comfortable enough to invest in the latest technologies later this year.
Fund manager Robert Stimpson at Oak Associates, which manages $1.2 billion in investments, argues that prospects are better this year as he expects price declines for commodities such as oil to help to turn around the economy.
"Since most commodity prices have corrected sharply over the last 2 months, it suggests inflationary pressures should continue to subside," he said. "The Fed might be able to lower interest rates to stimulate the economy, the prospects for tech and growth stocks does look better."
Stimpson blamed the timing in Dell's product cycle for its weak results, and said Research In Motion (RIM.TO: Quote, Profile, Research, Stock Buzz) and Apple were good bets as they have hot new gadgets ready for the holidays.
Shareholders of Corning Inc (GLW.N: Quote, Profile, Research, Stock Buzz) could also be in for a windfall because it supplies glass used in flat-screen televisions that are often a hit around the holidays, he said.
"If a technology company doesn't have a new product coming out it could languish in this economy," Stimpson said. "This is not an environment that lifts all boats."
(Editing by Derek Caney)
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