There is no doubt that in an up market you will find sectors late to the market rally party. Tech and IT stocks such as Microsoft Corporation (NASDAQ:MSFT), Nokia Corporation (ADR) (NYSE:NOK), and Computer Programs & Systems, Inc. (NASDAQ:CPSI) strengthen the case for finding high quality and value in a rising market.
Since the first quarter of 2012, year-over-year profits for tech and information technology companies have been falling to the tune of 2%, according to Bloomberg News. But don’t let that fact stop you from looking into this broad sector. Valuations have been decreasing as well, shown by the decrease of the price/earnings ratio of the tech sector to about15, which is one percentage point below the average price/earnings ratios for the whole S&P 500. The average price/earnings ratio fell from 24 in 2007, meaning even with the rebound, tech and investment technology stock prices are now about 40% below where they should be compared with the market at similar levels in the past.
With stock prices down, James Paulsen, chief investment strategist at Wells Capital Management, says, “They [tech and IT stocks] are getting to be really reasonable values.” This comment is a nice way of saying that computer and information technology stocks have been among the stock market’s worst performers. As the S&P 500 climbed over 15% since April of 2012, the tech sector saw a net 2.5% return in the same period.
Buyout rumors have also begun to take place. In May, it was rumored that Intel was purchasing AMD, which led to a short squeeze and buying frenzy in AMD, pushing the stock well off its 52-week lows. The news of Yahoo! buying Tumblr and looking at Hulu afterward also has some brows raised.
It seems like a distant memory the last time there was a buying frenzy in Silicon Valley. If serious horizontal and vertical consolidation was to happen in the tech and information technology sectors, we would be safe in placing our funds into those sectors as mergers and acquisitions form a solid foundation of valuation to place your investments upon.
For instance, a closer look at Honeywell International Inc. (NYSE:HON) and ActiveCare’s relationship may prompt one to wonder why there hasn’t been any consolidation there. Since both are in the patient monitoring side of information technology, and ActiveCare has become the number-one provider of cellular glucometers—blood glucose monitoring devices—in the world, they are an obvious target for acquisition for Honeywell International Inc. (NYSE:HON)’s expansion initiative into this large—relatively untouched by big chips–market.
A fossil or a sleeping giant?
Microsoft Corporation (NASDAQ:MSFT) is always on the list of buying, selling, trading, and all types of playing around from the big funds and small investors alike. There’s good reason for it: Microsoft Corporation (NASDAQ:MSFT) is still the tech and IT bellwether.
Many call Microsoft Corporation (NASDAQ:MSFT) a “dinosaur,” but even the meteors from companies such as Apple and Google have yet to make this species extinct. And as a tried and true bellwether, Microsoft Corporation (NASDAQ:MSFT) has predictably shown us a flat, boring tech and information technology market as its returns mirror the S&P technology index moving average returns for the past five years.
For the quarter ending June 2013, Microsoft Corporation (NASDAQ:MSFT) is expected to bring in $20 billion in revenue, which is an excellent 15% increase year-over-year. And for the 28 analysts covering the stock at the major wires, the consensus is that Microsoft will take this quarter’s numbers and transform them into over 28% growth for the year, which will outpace the projected bottom-line growth of the S&P by about 30%.