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Washington Post Staff Writer
Sunday, August 9, 2009
If U.S. stocks have been hot recently, technology shares have been blistering. And news out of the technology sector last month only reassured some investors that the worst of the recession is over, with initial signs pointing to an economic recovery.
Soaring iPhone sales helped fuel a 15 percent increase in Apple's quarterly profit, while increased chip demand boosted unexpectedly strong results at Intel. Even Corning reported more buyers for its flat-screen television glass, reflecting more hope in the consumer electronics market.
But for investors, questions remain. Is it too late to claim a share of technology gains after prices have ballooned in the last several months? And will the economy continue to show progress, persuading companies to start retooling for growth with new computers and network upgrades?
"To me the biggest question mark is are we going to see a recovery in the economy in 2010?" said Ryan Jacob, portfolio manager of the Jacob Internet Fund, which, as of June 30, held shares of Apple, Google, Yahoo and eBay, among others. "If we do, I think tech prices will still look very cheap and I think we'll see a strong finish to the year. If that becomes more suspect, then I think it's going to be hard for valuations to expand further."
Perhaps the broadest measure of technology stocks' performance, the tech-heavy Nasdaq Composite Index is up 26.8 percent for the year and closed above 2000 last week for the first time since last October. Since reaching this year's low of 1268.64 on March 9, the Nasdaq has improved 58 percent, though the index would still need to gain another 43 percent to reach its recent peak of 2859.12 on Oct. 31, 2007.
Technology stocks are the top-performing industry sector in the Standard & Poor's 500-stock index, a broader market measure that is up nearly 12 percent this year. An index of information technology companies in the S&P 500 is up 36 percent. Without technology shares, the S&P 500's year-to-date returns would shrink to 7.9 percent.
Behind the gains, analysts say, are a number of factors: Few firms have kept as much cash on hand as Apple, Google and other tech giants, making them seem like better bets during a credit crunch.
Signs of improvement in the broader economy have also lifted the tech market. The annual rate of decline in gross domestic product was smaller in the second quarter than had been anticipated, the fragile housing market has shown some signs of recovery, and the labor market appears to be stabilizing, albeit at a low level by historical standards.
Non-farm payrolls fell by 247,000 in July, the Labor Department reported Friday, a far smaller drop than many economists had been expecting. The unemployment rate dipped to 9.4 percent from 9.5 percent.
Investors have been speculating that as the economy shows signs of recovery, companies may begin dusting off technology investments that have been shelved during the uncertainty of the downturn. "Eventually that business cycle has to come back in. The PCs on the desk eventually have to be changed," said Howard Silverblatt, senior index analyst at Standard & Poor's.
Then there's the smartphone. Demand for the mobile devices has swelled despite a recession that's crippled consumer spending. That's benefited not only the companies who make the devices -- Apple, with its iPhone, Research in Motion, with the BlackBerry -- but also companies such as Juniper Networks and Cisco Systems that sell equipment to connect networks and transfer data across the Web.
Shares of Apple and Research in Motion have surged more than 80 percent this year. Juniper is up 38 percent. Shares of Cisco, the world's largest network equipment maker, are up 31 percent since the beginning of the year and 63 percent since its low on March 9. Cisco reported Wednesday that its fourth-quarter profit fell 46 percent, to $1.1 billion, along with sales, dampening the market the next day. But chief executive John Chambers said Cisco was beginning to see ordering pick up and may have reached a "tipping point."
"If we continue to see these positive order trends for the next one to two quarters, we believe there is a good chance we will look back and see that the tipping point occurred in our business in" the fourth quarter, Chambers said in a statement.
Elsewhere, Internet portal Yahoo's stock is up nearly 14 percent this year, though it has slumped recently with investors reacting less than favorably to the company's new search and advertising partnership with Microsoft.
Despite the positive signs, stock prices still have considerable ground to make up to climb back to pre-recession levels. And risk remains for investors.
For investors seeking long-term returns, shares of technology companies should perform well, simply because technology is central to the U.S. and global economies, market analysts said. The demand for devices that allow consumers to browse the Web while riding on a train or waiting in a doctor's office is hardly expected to be subdued, they said.
Short-term investment bets on technology can be trickier. Any turbulence in the recovery process, for example, could affect technology stocks disproportionately, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
"Any stall, any air pocket we hit, any big disappointment on the credit side, the risk is tech could bear the biggest brunt because it is so pro-cyclical," Ablin said. "With tech, it's almost a leveraged bet on recovery and that's why it's done so well. If recovery stalls, it's going to be a leveraged bet on the downside, too. But I don't foresee that."