Technology stocks

Technology

Most investors haven't touched technology stocks since the tech bubble burst in early 2000; or they offloaded them for substantially less than they originally paid for them.  But, as Imelda Martin from Glacier Research notes, technology stocks are increasingly looking attractive on both valuation and growth grounds, and far-sighted fund managers are beginning to include them in their portfolios.

South African investors, according to the ACI, had committed over R2bn to technology funds at the end of March 2001 (into two local funds, and five worldwide funds).  This amount had shrunk to less than R200m at the end of the last quarter (and four of the funds had closed down). 

Looking back, it is clear that investors in technology stocks in the late 1990s ignored fundamental investment principles and simply bought anything with a dot-com label attached to it. At the height of the bubble a new IT company could raise significant amounts of money through its IPO (Initial Public Offering) even though it was still running at a loss or in certain instances had never even made any revenues. Investors ignored the state of companies balance sheets and bought stocks on the promise of growing demand for IT products and future profits. The US tech-heavy NASDAQ index gained 86% in 1999.  These investors have had to pay for their exhuberance.  An investor who bought the Nasdaq (the US index of technology stocks) at the top in early 2000 would only have recovered half his losses today.

Many retail investors vowed never to touch technology stocks again.  But the fundamentals of these companies are starting to look good (many companies have lagged on their IT spend since 2000), and their substantial underperformance relative to the rest of the market has resulted in fund managers liking them on valuation grounds too.  Microsoft, Cisco and Dell are in the top ten holdings of a number of global equity managers, and some local fund managers are holding Didata (up 43% year-to-date) and other IT stocks.  

Technology stocks are  more volatile than the general equity sector and few investors should have all of their equity exposure in these stocks.  But it no longer looks sensible simply to ignore them, and far-sighted managers already appear to be using them in their portfolios.