It's a good time to think tech.
The sector reported robust Q2 earnings, pushing stocks to
multiyear highs. The likes ofApple (
) andOracle (
) have started to pay or are boosting dividends. The improving
U.S. economy is sending corporate IT investments higher. And fall
will bring a parade of tech product releases for the holiday
season, likely giving stocks a neat fourth-quarter bump.
"Megacap information technology
have been outperforming the broader market," said Todd
Rosenbluth, director of ETF research for S&P Capital IQ.
"Apple posted stronger-than-expected second-quarter earnings,
while Microsoft announced a restructuring that is being viewed
with big stakes in these companies are feeling the
difference.Select Sector SPDR Technology (XLK), iShares Dow Jones
U.S.Technology (IYW), iSharesS&P North American Technology
(IGM) andVanguard Information Technology (VGT) are in strong
uptrends. Apple and Microsoft are their largest holdings.
S&P Capital IQ is recommending that
overweight their technology exposure.
Rosenbluth points to the sector's fundamentals, including
strong balance sheets that will be used for value-added R&D,
M&A, buybacks, dividends and debt retirement.
And valuations are favorable. "The sector trades at a
price-earnings and PE-growth multiple that is lower than the
broader market," he said.
Indexes Slow To Respond
Mainstream tech ETFs tend to be dated, with newer,
cutting-edge companies often left out of the mix, says Charles
Lewis Sizemore, a portfolio manager on Covestor, an online
investment management company. For example, XLK owns familiar
names such as Apple, Microsoft,Google (GOOGL) and evenFacebook
(FB), but notTwitter (
The underlying indexes reconstitute their holdings at a pace
out of step with changes in the industry, Sizemore explained:
"Tech companies can get very big very fast."
This year, semiconductor ETFs have outshone.SPDR S&P
Semiconductor (XSD), iSharesPHLX Semiconductor (SOXX),Market
Vectors Semiconductor (SMH) andPowerShares Dynamic Semiconductors
(PSI) are all up more than 20% vs. a 9% gain for SPDR S&P 500
XSD, SMH and SOXX have healthy asset levels and trading
Following The Leader
Fabless chipmakerCavium (CAVM),
an IBD Leaderboard pick
, has returned 58% year to date. The stock is 2% past a 53.42 buy
point, leaving it in buy range. Cavium has an RS rating of 93 and
an EPS rating of 96.
Demand for chips has accelerated this year as the PC industry
stabilizes and China builds out its LTE mobile communications
Coupled with a lean inventory supply chain, this should
contribute to a potential upside through 2015, in contrast with
fairly muted growth from 2011 to 2013, says Angelo Zino, a
technology analyst with S&P Capital IQ.
Investors can also look outside major tech-focused ETFs for
exposure to the sector.PowerShares QQQ (QQQ), tracking the Nasdaq
100 Index, has 58% of assets in tech stocks.
Besides Apple and Microsoft, its top 10 holdings include
social networking giant Facebook, another Leaderboard pick that
is up 37% this year.