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Get Four
|  | APRIL 5, 2005
Tech Stocks: Down But Not Out After a weak performance in the first quarter, S&P's Scott Kessler expects some improvement ahead and highlights a few solid buys The once-glamorous technology sector suffered in the first quarter of 2005. Scott Kessler, director of information technology research for Standard & Poor's, reports that the sector in the S&P 1500 fell by nearly 5 more percentage points than the index as a whole. Kessler attributes the drop in part to "good but not necessarily great" first-quarter earnings. But he thinks the info tech group will do better in the second quarter by at least tracking the market. And nevertheless, S&P sees a number of strong buys among info tech stocks. Asked about the recent buyout of Sungard Data Systems (SDS ) by private-equity firms, Kessler responded that it may not be the last such deal. He notes that software company NetIQ (NTIQ ) has just announced the sale of its WebTrends Web analytics business to a private-equity firm for $100 million. Kessler made these and other points in an investing chat presented Mar. 29 by BusinessWeek Online and Standard & Poor's on America Online. He answered questions from the audience and Jack Dierdorff of BW Online. Following are edited excerpts from this chat. AOL subscribers can find a full transcript at keyword: BW Talk. (Scott Kessler is an S&P Equity Research analyst. He has no ownership interest in or affiliation with any of the companies under discussion in this chat. All of the views expressed in this chat accurately reflect the analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this chat. For required disclosure information and price charts for all S&P STARS-ranked companies, go to spsecurities.com and click on "Investment Research" and then on "Required Disclosures & Standard & Poor's STARS vs. Closing Prices Charts.") Q: Scott, how have the stocks in the info tech area been doing, as S&P sees it? A: Well, year-to-date through Mar. 24, the S&P 1500 information technology sector fell 8%, while the S&P 1500 [as a whole] fell 3.1%. And year-to-date through Mar. 24, each of the 15 subindustries within tech was down. So clearly, it has been a challenging first quarter for technology stocks across the board. Notwithstanding that, we continue to recommend a market-weight position in technology stocks, which recently accounted for roughly 15% of the S&P 1500. Q: Do you see a revival coming for tech despite the recent lag? A: I don't know if I see a revival, although I do expect these stocks to act better as the second quarter begins. We believe the fundamentals in technology are solid, the valuations reasonable, and the balance sheets strong. Those together constitute the bullish case for tech stocks. The negatives are sentiment and stock options. At this point, we believe technology stocks will track the broader averages -- an improvement from first-quarter performance. Q: To what do you attribute the first-quarter lag in tech stocks? A: I think part of it was attributable to fourth-quarter results that were good but not necessarily great and forward guidance that was perhaps overly conservative -- if provided at all. The market as a whole has been quite choppy due to concerns about rising interest rates and oil and other commodity prices. Higher interest rates, we think, support our opinion that large-cap technology stocks are a good place to be, given their limited need for capital and their diversified business models. Q: Do you feel stocks like EMC (EMC ), Cisco (CSCO ), JDS Uniphase (JDSU ), and 3Com (COMS ) can ever make a comeback? A: Interestingly, we believe that two of the stocks you listed are compelling opportunities right now. We have strong buy recommendations on Cisco and EMC. Large-cap technology stocks like CSCO and EMC are as reasonably priced as they have been for some time. In fact, based on S&P Equity Research's projections, the S&P 500 technology sector trades at a p-e/growth rate equal to the S&P 500. Generally, as you may well know, tech stocks have traded at a premium to the broader market. Thus, we think there's opportunity to be had with large-cap technology stocks, including CSCO, EMC, IBM (IBM ), and Microsoft (MSFT ), for example. We do cover 3Com and JDSU. We have hold opinions on both stocks. For all four of the stocks you asked about, we believe it will be some time before their early 2000 highs are eclipsed, if ever. Q: What do you think of the buyout of Sungard Data Systems? Will there be other such deals? A: I used to cover Sungard and believe it's a unique company that offered the private-equity community with a unique opportunity. I think the proposed purchase of Sungard, although the largest private-equity transaction I can remember in technology, may not be the last deal of significance for this type of buyer. Just yesterday [Mar. 28], software company NetIQ (NTIQ ) announced the proposed sale of its WebTrends Web analytics business to a private-equity firm for nearly $100 million. My sense is that these firms are moving up the food chain and looking at larger acquisition candidates because many of them are fraught with capital. I expect additional private-equity deals to be announced and technology to be a fertile center for activity. Q: Could you mention a few likely takeover or merger candidates in the telecom-equipment area? Or elsewhere? A: First off, the companies that I will mention are possible acquisition candidates, not likely ones. In the telecom-equipment area, companies have been dealing with purchasing delays from the major wireline and wireless carriers that are engaged in transactional activity. That being said, two companies we like in particular in the telecom-equipment subindustry are small-cap stocks Harmonic (HLIT ) and Powerwave Technologies (PWAV ). Harmonic is a play on converged video, voice, and data services. Powerwave is a play on growth in wireless communications.
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