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).