The IT sector is one of the few that appears to be powering through the economic storm, writes FIONA REDDAN
WHILE MANY Irish investors might be breathing a sigh of relief that they did not get caught up in the hype surrounding the flotation of Facebook last month – apart of course from Bono, whose investment group Elevation Partners has seen the return on its investment plunge – the much publicised rise and fall of the social media stock does not mean that investors should ignore technology stocks.
As dampened consumer demand and economic uncertainty reigns in Europe and the US, the IT sector is one of the few that appears to be powering through the storm. As stock markets start to gain ground once more in the US, indices such as the Nasdaq 100 are out-performing their broader counterparts such as the SP 500. Is there still value in the market though, or are we be headed for another dot.comboom and bust?
The most startling example of the resurgence of tech is Apple, a company which has come back from the brink several times and survived the death of its visionary leader to become the biggest company in the world by market capitalisation. And it has handsomely rewarded investors. If, for example, you had invested $1,000 in Apple in 1996, when its share price hovered in a $4-$6 range, your investment would now be worth over $110,000 (€80,782). While the stock currently stands at about $576, some analysts suggest it might yet reach $1,000, given the way it keeps surpassing its revenue records.
It is not just Apple that’s catching investors’ imaginations. Late last year renowned investor Warren Buffet even started buying into tech stocks, having previously sworn off them because he couldn’t understand what the companies did. “I could spend all my time thinking about technology for the next year and still not be the 100th, 1,000th or even the 10,000th smartest guy in the country in analysing those businesses,” he said back in 1998.
Now however, he has invested about $12 billion in IBM, taking a 5.4 per cent share in the IT services firm, after he was “hit between the eyes” by its competitive strengths.
Indeed today’s top tech stocks share a longevity and underlying fundamentals that appeal to “value” investors such as Buffet, who typically opt for blue-chip dividend paying stocks like Procter Gamble.
Many of the larger names such as IBM already have regular dividend strategies, but in March, Apple followed suit for the first time, when it declared the world’s second largest dividend pay-out, at $2.65 a share, with plans to pay quarterly, putting pressure on Google to adopt a similar strategy. Internet giant Google has more than $44 billion in cash and, while it has not yet given a commitment to pay a dividend, some analysts suggest that it might.
Analysts also like these companies because of their revenue-generation capabilities.
“The balance sheets of software technology companies are very, very strong, and their valuations relative to other stocks in the market are relatively low,” says Killian Nolan, an investment manager with Rabodirect, adding that they are also attractive because of their “high levels of recurring revenues”.
Indeed, while companies may have cut back in many areas as a result of the recession, spending on IT has held up a lot stronger than most areas. This has led to strong earnings and share prices in the sector.
At Merrion Stockbrokers, a “strategic” approach to technology investment is recommended, with the firm advising an overweight approach in names such as Apple, HTC, Amazon and Qualcomm. However while some investors favour picking specific stocks, for a diversified approach there are also numerous funds available to Irish investors, with offerings from most fund providers in the Irish market, including Irish Life, Ark Life and Zurich.
Many of these funds are simply index ones, tracking indices such as the Nasdaq-100 through underlying exchange-traded funds (ETFs), but charge upwards of 1 per cent a year for doing so. Given this, it might be a cheaper option to go straight for an ETF which also tracks a technology index – but at a lower cost. iShares, for example, offer a Dow Jones US Technology Sector Index Fund with a fee, or total expense ratio, of 0.47 per cent.
Remember that buying into an ETF will attract stockbroking charges, while there are also additional tax issues although these can be reduced by buying an Irish domiciled ETF, such as the iShares option.
For an active approach, you could consider Henderson Global Investors’ Horizon Global Tech fund, which is offered by Rabodirect. This invests in a globally diversified portfolio of technology-related companies, and charges an annual fee of 1.2 per cent, plus an entry/exit fee of 0.75 per cent each time.
Even by investing in a fund, however, you should expect your investment to be concentrated nonetheless, given the relative weighting of Apple. iShares’ Dow Jones fund for example, has a 22.5 per cent allocation to the favoured consumer stock, while its top four holdings (Microsoft, IBM, Intel) account for 50 per cent of the fund – which for some investors might signal an uncomfortable association with financial stocks’ dominance on the Iseq in days gone by. Similarly, Zurich Life’s fund has an 18.6 share in Apple, although Henderson’s fund has a less overweight position in Apple, at just 10.5 per cent.
With such concentration come risks. In the fast-moving world of technology, there is always the possibility that companies won’t move fast enough to keep up with changes. Remember Nokia? The Finnish telecommunications firm once dominated the mobile phone market, but was caught out by the rapid rise in smartphones and its share price recently hit a 15-year low, after it was downgraded to “junk” status by rating agency Fitch.
Now analysts fear that Facebook is also facing severe problems from the rise of smartphones, as it races to try and monetise traffic from mobile users of its website. However, as Nolan notes, the cash-rich position that many of the larger tech firms find themselves in means that, should competing technology emerge, they will be able to execute an acquisition swiftly.
There is always the risk that the sector might suffer the same fate it did in about 2000 when the dot.comboom burst spectacularly. In this respect, some analysts favour "old-style" technology stocks, which have a long history and record of earnings over their newer social media counterparts, such as Facebook and LinkedIn.
This website also caused a stir when it listed on the New York Stock Exchange last year. Its share price quickly doubled on its first day of trading, soaring to $120 thereafter from an IPO price of $45. Unlike Facebook though, it has held up better and is currently trading close to $100.
While IPOs might be thin on the ground, the tech sector is one that is sure to provide a steady supply of new names to consider. However it remains to be seen whether other potential IPOs, such as the microblogging site Twitter, can live up to the hype or whether they might end up going the way of the dot.comflops like pets.com.
