By Sam Stovall The S&P Information Technology sector continues its impressive rebound in 2003. The sector index gained 31.4% year-to-date through Sept. 26 -- the strongest performance of all 10 S&P sectors -- vs. the S&P 1500's 13.9% advance. In addition, none of the IT sector's 15 subindexes have declined so far this year.
Given this rally, it's no surprise that the IT subindustries dominate this week's Industry Momentum portfolio -- the roster of industries with top S&P Relative Strength rankings. A strong performer, and a new addition to the list, is the IT Consulting & Services group, which is covered by S&P analyst Richard Stice.
OUTSOURCING GAINS. While his near-term investment outlook is neutral, reflecting the ongoing IT spending slowdown, Stice is positive longer term as he believes that these companies' services greatly increase productivity and help reduce costs. He thinks areas for future growth include business-process outsourcing (in which businesses perform various data processing and back-office functions for customers) as well as the government marketplace, since officials are looking for new ways to control expenses and promote more efficient use of funds.
The analyst expects computer-services concerns to keep benefiting from an increasingly global economy, deregulation, an IT labor shortage, and e-business opportunities. Clients traditionally turned to these outfits to help cut costs, but many are now also seeking ways to boost productivity and revenue growth.
One example of this involves a growing segment of the professional-services industry: Services targeted at the Internet. Stice believes that businesses are increasingly turning to computer-services concerns to help ease their transition to this medium. Internet projects are becoming more sophisticated and complex, leading to a need for different skills for programmers, designers, and business strategists. Computer-services concerns can provide an array of services, including applications development, strategy consulting, and Web-page creation.
NEAR-TERM WEAKNESS. To deal with lackluster near-term prospects, some of these concerns have been supplementing their growth via acquisitions. Another strategy to gain momentum, in Stice's view, involves focusing on smaller and shorter duration IT-service contracts, which often involve fewer up-front costs and have a quicker payback time.
S&P's top picks in the group? Axciom (AXCM) and CACI International (CAI) each carry 4-STAR (accumulate) rankings.
Industry Momentum List Update
For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of September 26, 2003.
S&P STARS* Rank
Communications Equipment/Info. Tech
Cisco Systems (CSCO)
Computer Storage & Peripherals/Info. Tech.
Storage Technology (STK)
Consumer Electronics/Consumer Discretionary
Harman International (HAR)
Diversified Metals & Mining/Materials
Phelps Dodge (PD)
Internet Retail/Info. Tech.
Internet Software & Services/Info. Tech.
IT Consulting & Other Services /Info. Tech.
Office Electronics/Info. Tech.
Semiconductor Equipment/Info. Tech.
Wireless Telecom Svcs./Telecom Svcs.
* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief investment strategist for Standard & Poor's