Fund managers who invest in technology and telecoms stocks are sounding increasingly positive about the sector’s prospects compared with other parts of the market.
There is widespread belief that the tech sector has “grown up” since the IT bubble was pricked in March 2000. “We managed to get rid of a lot of the rubbish from 2001 through 2003,” says James Gautrey, a technology and telecoms specialist with Schroders. “Some of the companies in existence back then are still here today and I think – by and large – they do still make fairly interesting investments.”
These arguments are supported by the fact that tech and telecoms companies’ balance sheets appear strong while their share prices do not look over overvalued on fundamental measures. Many stocks trade on price-to-earnings ratios as low as 10-13 times next year’s earnings.
“We believe that many companies in the sector are now in much better shape than several years ago with cash on their balance sheets and valuations that do not look excessive, yet the area remains unloved,” says John Chatfeild-Roberts, head of the Jupiter Independent Funds team.
With $30bn in net cash, Microsoft is the sector’s titan. It trades at 16 times forward earnings and yesterday its shares still hovered at less than $30.
Schroders’ Gautrey says the company could yet generate a further $18bn to $20bn in yearly net cash, thanks partly to the launch of Windows 7.
Tyco Electronics, which trades at about $24 per share, is another favourite of Gautrey who believes its efforts to cut costs and restructure will improve its margins. He also favours Baidu, dubbed China’s Google, and Applied Materials, the US semiconductor group. Now trading at $12.82, Applied Material’s shares have risen about 25 per cent in the last year.
A wave of mergers and acquisitions could also boost the sector as more tech companies look to “cross-sell” products.
Andrew Williamson Jones, manager of BlackRock’s Global Equity fund, is bullish on telecoms as many stocks offer free cash flow yield of 10 per cent or more and have pared back costs. The chance to earn dividends is another incentive to buy into the sector as yields on telecom stocks are outpacing those of 10-year gilts and US Treasuries.
Vodafone, Verizon and AT&T all offer yields of 6 per cent or more while France Telecom and Deutsche Telekom’s yearly payouts are in the 8 to 9 per cent range. “In the rally of the last six months, telecom stocks have been left behind and now trade at a significant discount to the market,” says Williamson Jones.
But some advisers encourage clients to gain exposure to tech stocks via general equity funds. “I wouldn’t select a separate tech fund,” says Tim Cockerill, head of research with Rowan & Co, the advisory firm.
