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The Technology Sector Could Be A Diamond In A Rough Market
The Smart Profits Report
Thursday, September 25, 2008: Issue #561
by Paul Moore, Technology Specialist, Smart Profits Report
Amid all the current negativity surrounding the stock market, let’s turn our attention away from the financial sector for a moment and give a verdict on technology.
Right off the bat, let’s toss out this question: Is the outlook for technology shares really that bleak?
If it is, then the results from companies that reported their quarterly financial results ending in August do not reflect the negativity. In fact, shares of large-cap technology companies reporting in September reflect a positive bias, while the negative returns for the PowerShares QQQ Trust(Nasdaq: QQQQ) - the ETF that represents the Nasdaq index - reflects a negative bias.
You don’t need to be a rocket scientist to interpret this: Investors are overly negative, and when concerns are quelled, stocks respond positively.
Profit Growth Of These Four Technology Bellwethers Bodes Well For The Sector
In my last column, I focused on technology as well, and highlighted that on six occasions over the past 10 years, the QQQQ has chalked up a positive return over the last four months of the year.
In addition to that positive historical data, technology has also done well by way of Adobe Systems (Nasdaq: ADBE), Oracle (Nasdaq: ORCL), Red Hat Inc (NYSE: RHT), and FactSet Research Systems (NYSE: FDS) all of which posted earnings growth, despite pressure on the top-line. This is an indication that technology could be one of the sectors to show earnings growth, even though corporate and international technology consumers are strained.
|
COMPANY |
MARKET CAP |
EXPECTED EPS |
REPORTED PRIOR EPS |
YEAR EPS |
YEAR-OVER-YEAR EPS GROWTH |
STOCK REACTION |
|
Adobe Systems (ADBE) |
$21.3 billion |
$0.50 |
$0.46 |
$0.45 |
11.1% |
4.1% |
|
Oracle (ORCL) |
$106.7 billion |
$0.27 |
$0.29 |
$0.16 |
68.8% |
14% |
|
Red Hat (RHT) |
$3.2 billion |
$0.18 |
$0.20 |
$0.17 |
5.9% |
- 6.4% |
|
FactSet Research (FDS) |
$2.6 billion |
$0.64 |
$0.67 |
$0.60 |
6.7% |
1.1% |
|
|
|
|
|
|
AVERAGE |
3.2% |
|
PowerShares QQQ Trust (QQQQ) |
|
|
|
|
- 1% |
Want another example that investor and analyst expectations are lower than fundamentals warrant? Just take a look at the performance of General Electric (NYSE: GE) today.
Technology Could Be The Light At The End Of The Dark 2008 Tunnel?
This technology company announced this morning that it’s reducing its earnings guidance from the consensus $0.53 per share to a range between $0.43 and $0.48. It’s also suspending its share buyback program.
Logic would suggest that the stock would decline after news like this. But negative news is resulting in positive stock moves - and GE shares bounced higher by 4% today after trading down 5% in this morning’s pre-market trade.
So what’s my verdict? I continue to believe that technology shares will exhibit a positive bias into the end of the year, as the stability provided by enterprise licensing deals and long-term maintenance contracts should prevent extreme volatility in earnings. Moreover, cash-rich balance sheets should allow management teams to make strategic acquisitions and (General Electric aside) accelerate share buyback programs.
Paul Moore
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