Despised so Long, Tech Is Back

 | Apr 10, 2013 | 1:41 PM EDT  | Comments
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What didn't go up a lot that can fly if the economy's getting better? How about technology? That's right, good, old-fashioned tech, which dramatically underperformed in the first quarter.

We know that technology stocks have been in a bear market almost for a dozen years. They have been horrendous performers for a host of reasons.

There's the demise of the growth in the personal computer, which has crimped everything in the PC chain from the makers like Dell (DELL) and Hewlett-Packard (HPQ) to the innards like Intel (INTC), Microsoft (MSFT), Western Digital (WDC), Seagate (STX) and Micron (MU).

There's the move to the commoditization of the smartphone, which crushed Nokia (NOK) and hurt Texas Instruments (TXN) and damaged Skyworks (SWKS) and Broadcom (BRCM).

There's the pause in Apple (AAPL) orders, which has hammered Apple and left suppliers like Cirrus Logic (CRUS) in the dust.

There's the decline in enterprise spending, which has damaged everything from Oracle (ORCL) and Cisco (CSCO) to Ciena (CIEN) and Juniper (JNPR), or the lessened demand for semiconductors that stymied KLA-Tencor (KLAC), Lam (LRCX) and Applied Materials (AMAT).

I could go on and on for this gigantic part of the S&P 500. It seems that only the online companies with the most leverage to mobile have worked, mostly Google (GOOG) and now Yahoo! (YHOO) and, yes, Facebook (FB), although even there it's been in fits and starts.

All of that seems to have changed overnight with this new quarter and while it may not be as sustainable as it appears once we start getting the quarterly earnings, there's a move afoot and it has to be reckoned with. What could be driving this sudden urge to own tech?

First, this rally is defined by a belief that worldwide growth will occur in the second half of this year. What are the components? Europe putting in a bottom, a bottom that comes from an understanding that the leaders of Europe will bend on the austerity issues in order to placate whole countries that can't put people to work. And China starting to reaccelerate because the Chinese New Year, which had put a damper on spending, is now behind us and the inflation numbers are low enough that the new government can stimulate growth. Japan, which, like it or not, could have some real growth now that its Fed is printing money. Japan used to be a huge buyer of tech like China is now.

Finally, the United States is getting better, too. The GDP growth trade for tech is on and it's working as consumer and corporate spending seem to be getting more robust. Second, the valuations are insanely low vs. even the worst historic levels. I did a conference call with my Action Alerts PLUS Co-Portfolio Manager Stephanie Link today and we were marveling that so many of the terrific tech stories of old sell at 11x earnings (Oracle, Intel, Cisco, even Apple).

Seagate and Western Digital sell at 6x earnings. It isn't like these companies have no growth, and whatever growth that we thought they have will be accelerated by growth in worldwide GDP.

In a world where safe stocks sell at 18x to 20x earnings, with similar yields to companies like Microsoft, Intel and Cisco, you get any earnings growth, which you will if the world's growth improves, and these stocks can keep going higher, perhaps much higher.

Oh, and just in case you think this is crazy, consider the curious case of Oracle. Here's a company that screwed up big time when it reported last and its stock fell to $31 from $36. But at that price, the stock told at 11x earnings, even though it has a terrific balance sheet and some promise for the second half. The result? We have had a huge bounce from that level to $33.69 and it looks to go higher.

With that green light from a disaster quarter we get some just-OK quarters and you can see a run. You get actually positive quarters and the run could last for the rest of the quarter. Tech, despised for years, is now back. If it can get through the earnings thicket, the move could have huge legs if it simply attempts to play catch-up with the rest of the stock market.

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