January 21, 2013 10:45 pm

Tech stocks fall out of favour

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A new year has not been kind to US technology stocks.

Their underperformance is gaining momentum as investors price in poor earnings results and the shares of Apple are ensnared in a bear market.

One of investors’ favourite sectors up until mid-September, when it comfortably outperformed the broader market, technology stocks changed course in the fourth quarter, with the slide accelerated by the fall in Apple shares, the largest component in both S&P 500 and Nasdaq Composite.

After posting double-digit earnings growth during the first three quarters of 2012, the technology profit expansion is forecast to turn negative for the final. That bestows on tech an unwanted label as the second-worst performing sector among the major S&P 500 groups this earnings season, according to FactSet.

Following negative outlooks, analysts have adjusted their expectations from an 8 per cent gain to a 3 per cent decline, which will be the first decline since the fourth quarter of 2009.

Among big tech companies reporting earnings results this week are Google , IBM , Microsoft and Apple.

Investors will particularly watch Apple’s results and guidance, due tomorrow, with a lot of interest, according to Quincy Krosby, market strategist at Prudential Financial.

“Warnings and downgrades to the outlooks have set the stage of very low expectations for the sector, so investors will be focusing on guidance and details about future demand before we see an enduring trend.”

Apple is expected to report its first quarterly decline in nine years, according to FactSet. Apple shares have lost nearly a third of their market value since peaking last September at $702, immediately after the launch of the iPhone 5.

The gloom across tech touches many corners with sharp profit declines expected to come from semiconductors, semiconductor equipment, office equipment and computers and peripherals, as consumers as well as businesses have been embracing mobile and cloud technology at a rapid speed, according to FactSet.

“As mobile computing is getting more and more commoditised, traditional PCs will be pushed aside just like mainframe computing was pushed aside in the 80s,” said Roger Pine at Briaud Financial Advisors. “The Dells and HPs of this world, as well as enterprise software and semiconductors used in PCs are facing an existential crisis, something which we have been seeing in their earnings in the past year.”

Indeed, investors punished Intel in 2012. The stock is down 15.5 per cent over the past 52 weeks, for being too slow to embrace tablets and smartphones. Last week Intel reported its fourth-quarter earnings dropped 15 per cent from the same quarter a year earlier, as the chipmaker noted the rise of tablets and a continuing fall in sales of PCs as well as a challenging economic environment.

For all the gloom, some think the selling is providing investors with a buying opportunity.

“The tech sector has been oversold in the past few months,” said Brad Sorensen, director of market and sector research at Schwab. “A big rally up until summer prompted investors to cash in and take profits.”

He added: “The technology companies are also well positioned with the cash-rich balance sheets, which will enable them to invest in innovations and acquisitions as well as paying dividends.

“Third, valuations are very attractive – it is the cheapest sector, which is trading at 11.7 times forward earnings.”

Wall Street was closed Monday for Martin Luther King Day

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