Why 2006 will see the resurgence of tech!

For years tech stocks had been the darlings of Wall Street…until 2001! Following 2001, they became the eyesore in the family picture (people’s portfolios) that no one wanted to talk about! Homebuilding and oil stocks took the place as Wall Street’s favorites for the last five years, but they are beginning to lose their shine. What looks cheap on a comparative level, dare I say it? Tech!

If I were to tell people five years ago that Microsoft would trade at a P/E of 23.71, which would be slightly over the S&P 500’s  P/E of 15, people would have me locked up in a padded room! But looky, looky, now Microsoft is doing precisely that, and it is cheap, cheap, cheap!!! Now I know people have a strange aversion to buying cheap stocks when they would rather chase stocks which are peaking, but the way you make money is buying when no one wants to own them and selling them when everyone has to own them!

Why tech has not moved? But is primed now!

1.)    Inventory

2.)    Mega Caps

3.)    Innovation

4.)    Investor sentiment

1.) Inventory

Stocks like Microsoft, Alcatel, Cisco, and Hewlett-Packard have not moved because of a number of reasons. Number one being inventory! Everyone bought so many servers, routers, DSLAM lines, copper and fiber optic wires, that they did not need to buy any more for years! So, orders for tech products dried up, and companies like Cisco, and Sun had warehouses full of aging servers and semiconductors that they could not even give away, let alone sell! So all of these companies were forced to write down all of these as losses, which were basically a way to clean them off of their balance sheets while creating billions of dollars in “paper losses” when  they reported earnings! People never like losses, even if they are on paper, and this is one reason why these stocks have been left for dead! Guess what? Now these companies have very little inventory and have streamlined operations, which leads to improved efficiency!

2.) Mega Caps

Microsoft 10.64 billion shares out, Intel 6.03 billion out, Cisco 6.27 billion shares out! With that many shares out one can see why it can be hard for these stocks to get moving!  One thing that will move these stocks is a change in sentiment on the Street. This change will come about when corporate information technology (IT) spending picks up, which I believe will coincide with the release of Vista from Microsoft and the need to update the corporate IT backbone which is in desperate need of an upgrade.

3.) Innovation

I have a theory which is all techs follow Microsoft! Why? Look at what year your operating system was made? Are you still running windows 2000? Maybe you are up to date and running Windows XP 2003? Again, an almost three year old operating system which is slow and outdated! Microsoft will finally be releasing their long awaited new operating system, Vista (formerly Longhorn). When this hits the market the corporate sector will be buying it like mad because it will be faster and more efficient which means higher productivity! Just look at how common wireless internet connection is in 2005. Five years ago it was hard to come by and very expensive. I stopped at a truck stop in Cleveland, TX and they had wireless internet! People will buy Vista because of speed and all the new applications which will be offered. In order to keep pace with Vista computers will need faster chips, and Texas Instruments will supply them. (One of the many reasons we are beginning to accumulate Texas Instruments) Remember when Microsoft Excel was only used by really advanced PC users and business people, now if you can not operate Excel you are going to have a tough time getting hired to do anything! People will most likely buy new computers (from Dell) which will come stocked with Vista already! Intel and Texas Instruments will sell chips to Dell! It is basically a domino theory I have that has not been proved, but I do not think it is a coincidence these companies have not done much as Microsoft has struggled also!

4.) Investor Sentiment

One of the most important aspects of the stock market is psychology which controls investor sentiment. For five years the sentiment from Wall Street and the public’s view on tech can only be defined as hatred! Many people were given 3^rd degree burns from purchasing highly overvalued tech stocks back in the late 90’s. Once tech stocks start moving again people will begin buying because as Jack always says, “Greed always overcomes Fear!” I believe tech will move because money managers have too much cash on the sidelines and every time they sell oil or housing stocks the pile of cash increases, now where will they reinvest this cash??? Well most intelligent managers prefer to buy cheap and no other sector, besides pharmaceuticals and autos, are cheaper than tech stocks. Cash will pile into the sector because the sector is trading at low P/E’s and has a potential for double digit growth rates as the economy continues to grow and people demand faster and more advanced product solutions, and more importantly, once enterprise spending picks up for corporate America!

We have already been buying some tech stocks over the last few months ( IBM, and we are beginning to purchase and have a list of other tech stocks that we are going over with a fine-tooth comb in order to decide which ones we think have the greatest potential for price appreciation based upon fundamental reasons.

Thanks, and have a great day!

Brad