Tech stocks: watch before you jump
This past week was noteworthy for technology investors. Share prices in this sector rose 9.4%. After the market closed on Tuesday, Intel’s (INTC) second quarter earnings announcement injected life back into the stock market and sparked a bullish stampede on many tech names.
Intel reported its strongest growth from the first quarter to the second since 1988 and offered upbeat comments for the second half of 2009. Based on improving conditions in the PC market, the technology leader expects third-quarter sales to be close to $ 8.5 billion, well above the $ 7.8 billion tally predicted by analysts. Commenting on the chip giant’s results, one analyst joked: “Intel had a spectacular quarter in almost every metric.”
This bullish enthusiasm continued through the week after International Business Machines (IBM) also bungled analysts’ earnings forecasts. Relentless cost reduction through automation and job shifting to lower-cost locations allowed IBM to increase its profits by 12% to $ 3.1 billion despite sales declining 13% to $ 23.3 billion. millions. IBM’s earnings tally of $ 2.32 per share beat analysts’ forecast of $ 2.02 per share. The tech titan beat its 2009 EPS forecast to at least $ 9.70 a share, 50 cents a share more than its January forecast.
Although Intel and IBM reported relatively strong results, the strength of operations did not resonate with other technology names. Nokia’s forward-looking statement (NOK) is of concern to investors. Lagging behind rivals like Apple (AAPL) and Research In Motion (RIMM) in the smartphone race, Nokia cut its forecast for operating margin on ‘mid-teens’ phones to roughly 10%.
Citing weak demand for computer hardware from business customers, higher component costs and a competitive pricing environment, Dell (DELL) lowered its gross margin forecast for its July quarter.
Invest in technology?
So with tech companies performing mixed, is it worth investing in the tech sector? Given the prospect of a stabilized economy, I think the answer is yes. However, selectivity is key.
Look before you jump!
Fidelity Select Technology (FSPTX), Technology Select Sector SPDR (XLK) and Vanguard Information Technology (VGT) represent a sample of broad technology-related sector funds and ETFs available for investment. This is how these investments have performed since the market low on March 9.
FSPTX has led the pack with a whopping 70% return. This exceeds the 53% gain for VGT by 17%. XLK lagged behind the group with a 45% advance.
Why such differences?
As always, the devil is in the details. While FSPTX, XLK, and VGT have technology in their names, they differ in share market capitalization, industry exposure, and expense ratio. XLK includes telecommunications service companies, while the others typically do not. FSPTX often includes small and mid-cap tech companies, while XLK and VGT are heavily geared towards large-cap names.
Exposure to telcos like AT&T and Verizon is holding XLK’s performance down, while increased exposure to mid-cap names has helped FSPTX outperform the competition since March 9. Rather than choosing investments with the lowest expense ratio or the highest trading volume, it pays to understand what your mutual fund or ETF owns.