It should be a good year for techs in 2004 but can it be as strong as 2003? Our sources say no.
December 22, 2003: 1:52 PM EST
By Paul R. La Monica, CNN/Money Senior Writer
NEW YORK (CNN/Money) - After enduring three years of punishing losses, tech investors finally had a reason to celebrate in 2003.
The Nasdaq, through Dec. 19, was up 46 percent year-to-date. High profile stocks such as Intel (INTC: Research, Estimates) and Cisco Systems (CSCO: Research, Estimates) have soared more than 80 percent while Yahoo! (YHOO: Research, Estimates) and SAP (SAP: Research, Estimates) have more than doubled. So with that in mind, it's time to take out our trusty Magic 8-Ball and ask it what it thinks about the tech sector's prospects in 2004.
(Frantic fit of shaking ensues) "Oh, Magic 8-Ball, will tech stocks enjoy another good year in 2004?"
You may rely on it.
"Thank you most wise and all-knowing Magic 8-Ball. But will tech stocks go up as much as they did this year?" (More vigorous shaking)
My reply is no.
Great expectations baked in already
The outlook for tech certainly is good. According to First Call, analysts are expecting earnings growth of 31 percent for the tech stocks in the S&P 500.
And valuations, while certainly rich, are not as high as they were towards the end of the last tech bull market. The S&P 500 Technology sector is trading at 29 times estimates for the next four quarters.
But Wall Street's expectations for tech are much higher going into 2004 than they were for 2003 at this time last year. So there will probably be fewer positive surprises from tech next year.
It was a very good year for techs. But can the Nasdaq do it again in 2004?
"The fundamentals for tech will be stronger next year but I'd be surprised if the stock performance was as strong," said Kevin Landis, chief investment officer of Firsthand Funds, an asset management group that specializes in tech investing. "This year we had an economic recovery plus a bounce off the extreme pessimism we had in March."
Also, now that most market observers think that the worst is over for tech, the proverbial "easy money" appears to have been made in many struggling stocks that rallied the most this year.
"Investors have to be far more selective in 2004," said Michael Shulman, director of research for ChangeWave Research, an independent tech research firm. "The worst performing companies were the best performing stocks and stocks were perceived as cheap because of a low stock price rather than actual value."
Consumer is (still) king
The big wildcard for the sector is just how strong of a pickup there is in spending by big businesses. And even though the economy does seem to be improving, significant job growth has yet to follow. So there's little reason to expect much more than low to mid single digit percentage growth in IT spending.
"Corporate spending is still sluggish. There has been improvement but not at rapid clip," said Albert Lin, interim director of research with American Technology Research, another independent tech research boutique. "Until there's a real pickup in enterprise spending, we won't see techs that rely on that do as well and investors may have to wait until 2005 for that."
Gadget crazy!
5 stocks that have benefited from strong consumer electronics spending and should continue to do so in 2004.
Company 2003 Price change Est. LT EPS Growth
Comcast 35.4% 15%
Cox Communications 20% 14%
Maxtor 103.2% 12%
SanDisk 200.4% 21%
Western Digital 63.1% 10%
* data as of 12/19/03
Source: Thomson/Baseline
Due to the still uncertain outlook for corporate tech spending, Shulman, Landis and Lin all think that techs with a focus on the consumer should continue to do well in 2004.
All three mentioned disk drive makers such as Western Digital (WDC: Research, Estimates) and Maxtor (MXO: Research, Estimates) as good bets since they are likely to benefit from the increased adoption of digital video recorders (think TiVo).
Shulman and Lin said they like cable firms Comcast (CMCSA: Research, Estimates) and Cox Communications (COX: Research, Estimates) since they are likely to gain the most digital cable subscribers. And Landis and Shulman both recommended SanDisk (SNDK: Research, Estimates), which makes flash memory cards used to store data in devices such as MP3 players and digital cameras.
Several risks remain
But most techs are likely to run up against tough comparisons in the second half of the year since earnings from this year's third quarter were fairly strong and fourth quarter results are expected to be robust as well.
There will also be more pressure on large tech companies with significant international exposure, such as Microsoft (MSFT: Research, Estimates), Intel, IBM (IBM: Research, Estimates), Hewlett-Packard (HPQ: Research, Estimates) and Oracle (ORCL: Research, Estimates), to show real sales growth since they were helped this year by currency fluctuations.
Oracle, for example, reported a year-over-year revenue increase of 8 percent in its most recent quarter. But nearly all of this gain was due to the weak dollar having a favorable effect on Oracle's international sales.
"One thing that will hurt international tech companies is that we don't expect the dollar to weaken much more so year-over-year revenue gains are going to be a lot tougher to come by," said Alan Loewenstein, co-manager of the John Hancock Technology fund.
Add all this up and it means that it will probably be tougher for investors to make a killing on tech as they did this year.
David Joy, capital markets strategist for American Express Financial Advisors, thinks that the Nasdaq could gain as much as 10 percent in 2004... but that it will most likely underperform the Dow and S&P 500.
And Steven Tuen, co-manager of the Kinetics Internet fund, said he's unsure techs can live up to what are now very lofty expectations from Wall Street for next year, particularly if the economy begins to cool.
"The economy has grown strongly but this level of economic growth is probably not sustainable," said Tuen. "Next year should be a decent year, but we're not expecting it to be a blockbuster year."
So let's bring back our Magic 8-Ball for one more question. "Oh mighty orb, will the Nasdaq bounce back with a super year in 2005?"
O Clubeinvest.com informa que nenhuma da informação
aqui facultada deverá ser entendida como conselho ou recomendação
de qualquer tipo de transacção ou investimento.
