Billionaire investor Jim Rogers may be most famous for calling
the bottom of the commoditiesmarket and buying in 1999, just before
it surged 22% during the following three years while the S&P
500 lost almost 40% in the same period.
But the co-founder of the Quantum Funds with George Soros could
be just as famous for some of his warnings. In a 2007 interview
with Reuters, Rogers predicted a 40-50% drop inreal estate prices
in some areas of the United States and a massiverecession across
We all know how that prediction turned out.
So it's no surprise investors take note when the legendary
investor makes any market prediction. And Rogers is now warning
that one sector of the market is "priced in lunacy," so he is
betting heavily against the group. The sector has seenearnings fall
by 4.3% in the third quarter compared with the same period last
year, almost double the decline of 2.2% for the overall market.
So which sector could be headed for a big drop?
Rogers is talking about technology.
Bears have a lot to growl about...
To be sure, there are several reasons the technology sector is due
for acorrection . The sector outperformed all others during the
past four years with an annualized gain of 19%, while the S&P
500Index gained 12% in the same period. This outperformance may
already be working itself out with a drop of 10% so far this
quarter compared with a decline of 6% in the rest of the
In terms of valuation, the stocks in the
Technology Select Sector SPDR (
, for example, currently trade for about 13 times trailing
earnings, which is right at the average for the overall market, but
higher than that of the financials and energy sectors. And dividend
yields are not as good either. While many of the big players such
Microsoft (Nasdaq: MSFT)
Apple (Nasdaq: AAPL)
have started to pay dividends, the sector as a whole only
pays a 1.7% dividend yield compared to an average of
2.1% in the overall market.
Of more concern, four years after the financial collapse, U.S.
companies have yet to really ramp up hiring. While Europe and China
are looking incrementally better, the United States is facing a
huge fiscal gap in the coming quarters, with even the most
optimistic forecasts only calling for about 1.5% gross domestic
product growth. With labor already cut to the bone, companies are
putting off improvements in tech spending ahead of the fiscal and
One big clue to the level of frothiness in the tech sector could
be coming from the rebound in real estate prices inSilicon Valley .
Real estate has soared in the tech capital and prices are off their
peak by just 1.3% in some cities, while much of the rest of the
state continues to struggle with foreclosures.
Bulls still have room to run in individual stocks
There may yet be hope for the sector. Tech companies in the United
States earn more revenue outside U.S. borders than any other
sector, making the tech industry more resistant to fiscal cliff
worries and weakness here at home. Revenue should be marginally
supported if Europe can stage a rebound or ifemerging markets
continue their economic march higher.
President Barack Obama will need tobarter with Congress if he
wants to let the Bush-era tax cuts expire for those making more
than $250,000 a year. One possible deal could revolve around
another tax repatriation holiday like we saw in 2004. Under a
repatriation holiday, U.S. companies are lured to bring foreign
profits back to the country by taxing them at a roughly 5%tax rate
, rather than the current 35% corporate rate. Because the tech
sector has the most overseas revenue, it also has the most cash
held overseas, so it could win big with such atax holiday .
In addition, Microsoft launched Windows 8 in October and will
stop supporting Windows XP in early-2014. This could reinvigorate
the corporate spending cycle for information technology (
) and services. Further, if demand in fact rebounds, then tech
spending usually leads thebusiness cycle because it is easier to
buy IT and services than to add staff.
Quality and value vs. hopes and dreams
Even Rogers admits there will always be success stories, but the
problem is when an entire sector is pushed up without any real
difference between the good and the bad. This was evident in some
of this year's catastrophic IPOs --
Facebook (Nasdaq: FB)
Groupon (Nasdaq: GRPN)
Investors seem to have forgotten the lessons of the 2000 tech
bubble, and are now paying meteoric prices for very little in
earnings. While Groupon and Facebook have seen theirshares sink
since their IPOs, shares of
are up almost 10% since itsoffering in May 2011. LinkedIn is
basically Facebook for professionals and does not command nearly
the audience, so why is it that shares are trading for more than
665 times trailing earnings? Only a handful of other stocks in the
market trade so expensively, and they are all small or mid-cap
companies. Earnings are down during the last two quarters and the
company has yet to present a clear strategy tomonetize on mobile
While there are plenty more examples of unrealistic prices in
the tech sector, there are also some good deals. I wrote in
September about the INTC). The shares trade for just 8.8 times
earnings and pay a 4.5% dividend yield. Investors are worried that
the emergence of smartphones and tablets will make PCs obsolete,
but, as I mentioned before, there are several catalysts coming next
year that could send the stock dramatically higher. The company is
extremely well-run, with anoperating margin higher than 95% of
peers in the industry and has bought back $1.4 million in shares
this past quarter.
Risks to Consider:
Half of investing is keeping your profits before the bottom
drops out of the market. Companies with strong balance sheets and
good value should do well during the next year, but may see a
short-term drop as investors take the entire sector lower.
Investors should be ready for a short decline on sentiment before
stronger stocks head higher.
Action to Take -->
After years of outperformance, the tech sector could be due for a
correction, as Rogers expects. You may not want to neglect the
entire sector, but be selective and know when to take your money
off the table. Given the valuations in much of the sector,
investors may want to avoid some of the more expensive stocks and
the general sector funds. For those who do not want to completely
avoid the sector, look for large-cap companies with strong balance
sheets that pay healthy dividends such as Intel.