Tech stocks are finally working to redeem themselves from the 2000 tech-stock bubble.
While the broad market stumbles out of its credit-induced stupor that started in 2007, tech stocks ironically are one of the areas of strength by being fiscally sound. "Tech companies took a conservative posture," says Ryan Jacob of Jacob Internet fund. "Tech has been a place you could see some growth without as much risk."
As a result, tech stocks are:
•Beating the other benchmarks by a mile. The tech-heavy Nasdaq composite is up 16.4% this year, trouncing the 3.8% drop by the Dow Jones industrials and 1.8% gain of the Standard & Poor's 500. The Nasdaq's 45% rise from the March 9 bottom and 20% gain during the second quarter also outshine the S&P and Dow during the same period.
•Topping the sectors. The tech sector is up 28.8% over the past six months through Monday's close, says Capital IQ. Tech's rise this year tops the runner-up, materials, and its 18.6% gain.
•Finding a varied supporting cast. It's not just one barnburner tech stock lifting the tech indexes. Of the 50 best S&P 500 stocks this year, 14 hail from the information technology sector, says Capital IQ. Only one other sector comes close, consumer discretionary, also with 14. But one of those top consumer stocks is online retailer Amazon.comamzn, considered a tech by some.
•Finding leadership within leadership. Internet stocks are doing even better than tech at large. The USA TODAY Internet 50 is up 27.2% this year and the e-Consumer 25 subindex 34.2%.
Investors have been keen on tech stocks, especially during the worst of the credit crunch, largely because the companies have been reluctant to use debt. "These businesses produce so much free cash flow, there's no reason to go out and borrow," says Uri Landesman, strategist at ING Investment Management.
Additionally, the tech industry is generally an early beneficiary of a better economy, says S&P's Sam Stovall. Other sectors that tend to rise during the early stages of an economic recovery, financials and consumer discretionary, are loaded with worries about the health of the financial system and consumer, he says.
Investors trying to choose between tech, financials and consumer discretionary are finding "it's like selecting a spouse. All three are good, but which one comes with the least baggage?" Stovall says.
Unlike other industries that are seeing their markets contract, some technology companies still have large opportunities. High-powered cellphones and supersmall netbooks present new avenues for all sorts of tech companies, says Bob Turner of Turner Investment Partners.
While tech stocks have already run up, Turner points out that there's still upside, as they are well below their 2000 highs. The Nasdaq is down 64% from its March 10, 2000, record high.
Jacob, too, thinks that even if the economy grows at a moderate clip, tech companies' earnings can prosper thanks to cost cutting. But if things slow more, the tech rally could be vulnerable. "If things start to get worse again, then no one will be immune, including tech," Jacob says.