Following up on my blog post in the beginning of the year, I continue to expect the technology sector to outperform the overall market (S&P 500) in 2013. This opinion is based on three years of underperformance of the technology sector given a depressed level of telecom and enterprise capital spending which has compressed valuations for technology stocks vs. other sectors like consumer discretionary which as been a strong relative performer over that three year period. I continue to believe we will have some recovery on capital spending in both telecom and enterprise networks in 2013, which together with lower relative valuations, should allow the technology sector to outperform in 2013.
So far in 2013, the technology sector is up around 4.5% vs. the 2.5% return of the S&P 500. While it is still very early in the year, this initial outperformance and strong stock performance from IBM and Google (two large components in the technology sector index) today after their reporting their earnings (both are up about 5%-6% so far this morning) are very good signs. The depressed level of technology stocks has also been supported by recent discussions in the press of Dell being a potential LBO candidate, and HP potentially being broken up to create shareholder value if the company does not show signs of a turnaround in 2013.
The biggest potential risk to technology outperforming in 2013 in my view is the performance of Apple as it makes up to 20% of technology index given its large market cap. I am not particularly positive on Apple as it is losing momentum (see my prior blog post on Apple for more details) and does not play into the theme of recovering capital spending for technology stocks. However, the stock has declined close to 30% off its high and is discounting many of the negative fundamentals I discussed in my earlier blog on the stock.
Disclosure: I am currently not long or short any stock mentioned in this blog post (i.e. Apple, IBM, Google, Dell or HP). I also do not plan on taking a position on any of these stocks in the next couple of days. I am long the technology ETF ticker VGT.
Addendum – With the selloff in tech shares today 1/24/13, I am considering purchasing shares in technology stocks mentioned in this post.