Tech stocks are back with a bang, but steer a safe course or be dashed on rocks
A visitor views Apple patents displayed at an exhibition in Geneva. The exhibition, which will run until April 26, shows patents for iMac, iPhone, iPad and Mac Book
Once again the seductive siren call of technology stocks beckons investors. Especially since Apple announced a huge stock buyback along with its first dividend since 1995.
Should you follow that call, or put wax in your ears the way Odysseus's crew did when they passed the island of the seductive Sirens?
There is always a safer course. Sure, technology share returns may be singing a pretty song right now. The S&P North American Technology Sector Index (Total Return) is up about 18pc this year up to March 16, according to Standard and Poor's. The sub-index for technology that tracks hardware has risen about 25pc.
The love affair with Apple products and shares continues unabated. Microsoft is a less sexy offering, but is still relatively ubiquitous in the software world. Along with telecom giants AT&T and IBM, these tech goliaths comprise four out of the top 10 constituents of the S&P 500 index.
Tech is back in such a big way that, with a year to date return of 19.6pc (as of March 16), it has almost eclipsed the financial services (up 21pc for the same period) group as the largest single sector within the S&P 500. This pretty much brings tech stocks back to where they were at the height of the dotcom bubble. Is it a mere coincidence that all this happened right around the time the 244-year-old Encyclopedia Britannica went to all-digital editions?
By the way, did I say bubble? We have little way of knowing if we're in one now, although software, hardware, Internet, networking and technology services sub-indexes are all showing double-digit run-ups this year.
Is this a broad-based rally or are major technology buyers like corporations and governments retooling after the 2008 meltdown and recession? Probably a little bit of both, plus a high dose of sector rotation.
Last year, high-dividend stocks like utility companies were the darlings as the market got the heebie-jeebies over the eurozone debt crisis and US debt-ceiling dust-up. Those two gremlins have not been entirely vanquished, although big money managers have moved on.
The larger signal is that institutions are in growth-buying mode. They've made a herd movement towards companies that are growing their earnings. For the time being, the defensiveness that characterised a rocky 2011 is a brief memory this year.
None of this means, of course, that technology stocks are any less volatile than they used to be. It's important to note that any volatility measures on the way up -- since the beginning of the year, for example -- are going to be much lower than on the way down. Remember pets.com and the tech blow-out that accompanied the realisation that many high-flying companies were little more than cocktail-napkin business plans?
James Stack, president of InvesTech Research, is most cautious about the recent initial public offerings in social media stocks such as Linked-In and Groupon. He told me their prices may be based on "hype and hope." Another area of concern is Apple, which he notes is "a darling of Wall Street that's priced to perfection. It has room to disappoint."
To be sure, there's less fluff in some of those prices than there was during the big dotcom boom. The tech-heavy NASDAQ was trading at around 178 times trailing earnings in 1999, but is now only about 12 times trailing earnings, Stack said.
While today's tech leaders are much more solid earnings-wise, they are not immune to volatility. By its very nature, technology is something that changes relatively quickly, and many companies will be left in the dust. If trouble looms on the domestic or global economic front, tech shares could be sold off by big money players in a heartbeat.
Would it hurt to invest some discretionary cash in technology shares now? As long as it doesn't comprise more than 10pc of your total portfolio -- and you can afford to take the risk -- it makes sense to look at exchange-traded funds in this arena.
The SPDR Select Sector Technology Fund, holds most of the largest names in the business, but I'm concerned that 18pc of the fund consists of Apple stock.
Since loading up in any one sector exposes you to the heightened risk of concentrating your holdings in overvalued stocks, I'm always partial to a broad-based index approach. If you're trying to avoid overpriced stocks, look at the SPDR S&P 600 Small-Cap Value ETF or the PowerShares FTSE RAFI 1000 ETF. These funds buy stocks that are relative bargains and may have less downside risk.
At the very least, don't consider a move into tech stocks -- or any security for that matter -- as an all-in proposition based on the market's mood du jour. It's unlikely that you'll be able to time a successful exit when things turn sour. Lash yourself to the mast of your own financial destination. There's no need to take more risk unless you can afford to lose that additional investment.
If we've learned anything about bubble psychology, it's that this time is not any different than any other time. You can still end up dashed on the rocks. (Reuters)