These are exciting times for technophiles as everyday technology becomes more and more integrated into life. In the first few days of the year techies are treated to a major unveiled of Google’s (GOOG) much anticipated Nexus One handset. Furthermore, a feast of new gadgets and gizmos will be on display later this week at the annual Consumer Electronics Show or CES for those in the know. Also, the rumors swirling around a new Apple (AAPL) tablet computer will be settled in a formal announcement later this month. There is a buzz and an excitement in the air surrounding the tech sector, which begs the questions: Could tech stocks repeat the impressive run they enjoyed over the last year?
Technology stocks were one of the brightest spots in the entire market for the past year, and the 58% return (as measured by the sector iShare: IYW) is second among sectors only to Basic Materials’ (IYM) 59% return. By now, most investors are aware of the terrific performance of some of the large cap tech stocks in the past twelve months. Among the most impressive are Apple’s advance of 147%, Baidu’s (BIDU) 215%, and Google has more than doubled as well. Mid-caps like Western Digital (WDC) and Cree (CREE) have nearly tripled. The returns for some tech small caps are almost comical; DragonWave (DRWI) was a 13-bagger and Netlist (NLST) is more than 1600% greater than this time last year. That kind of performance is undeniably attractive to any investor.
Can investors expect the same sort of performance in the year ahead? We are not so sure that they should. Sure, there are electrifying product releases and CES is sure to wow the crowd with 3D-Television, tablet computers and eReaders, as well as plenty of developments on the mobile phone frontier. However, at Ockham we look at valuation and reject the notion of chasing momentum, and the outstanding performance of the tech sector makes it less attractively valued than some of the other sectors. As you can see from our Enterprising Investor’s Guide newsletter from just about a year ago, we viewed the technology sector as the most attractively valued of all sectors (the pertinent data is on the table of stocks on page 5). Sector ratings at Ockham are simply a capitalization weighted roll-up of all of the stocks we cover within the sector. The performance of the stocks in the technology sector have made us more cautious of the valuation and as of our most recent weekly newsletter we have tech as the fifth most attractive sector out of the ten broad sectors we follow.
We continue to believe that each portfolio should have some exposure to the high-flying tech sector, but it is no longer the most attractive sector in our view. We think value-oriented investors should be interested in the more defensive sectors of Healthcare and Utilities. The sectors we think have become a little overheated of late include Financials and Basic Materials, and may be due for a bit of a pull back. As for Tech, it’s in the middle of the pack which is understandable considering the sector’s nearly 60% appreciation over the past twelve months which is nearly three times the overall return of the S&P 500. Investors should be aware that the excitement over the latest technologies have not been lost on the investing world and have–at least somewhat–already been priced in.