Tech's Fall Stall

10/9/2017


The two sectors leading the S&P 1500 Index's advance in 2017 have lagged since the end of August. As the S&P 1500 has grinded 3% higher, the technology and health-care sectors are up 1% and 2% respectively, as shown in the table below.

TECH TAKES A BREATHER
The S&P 1500 Index's top-performing sector in 2017, technology, has stalled since August as investors dust off once-neglected groups such as energy and financial stocks. But most of our recommended technology stocks have continued to build on their year-to-date gains since August. Focus List stocks are in bold.
Sector Index
Recommended technology stocks
Price Change
 
Price Change
Sector
Since
Aug. 31
(%)
Year-
To-Date
(%)
 
Company (Price; Ticker)
Since
Aug. 31
(%)
Year-
To-Date
(%)
Consumer Discretionary
2
11
 
Alphabet
($967; GOOGL)
1
22
Consumer Staples
(1)
4
 
Apple ($153; AAPL)
(6)
34
Energy
10
(10)
 
Applied Materials
($52; AMAT)
14
61
Financials
7
11
 
CDW ($70; CDW)
10
35
Health Care
2
20
 
Cognizant ($73; CTSH)
3
30
Industrials
6
14
 
Facebook ($168; FB)
(2)
46
Materials
5
15
 
Lam Res. ($185; LRCX)
12
77
Real Estate
(2)
3
 
ON Semicond.
($19; ON)
12
50
Technology
1
26
 
Vantiv ($71; VNTV)
0
19
Telecom
4
(7)
 
VMware ($111; VMW)
2
40
Utilities
(3)
9
 
S&P 1500 Index 
3
13
 

In our view, the technology sector merits a closer look, given it accounts for nearly one-third of stocks on our buy lists. It still leads the market's gains for 2017, with the sector index up 26% versus the broad index's 13% gain. But sentiment might be cooling as investors take profits in top-performing stocks and rotate into overlooked pockets, such as energy (up 10% since August) and financial (7%) stocks.

Some technology industries face regulatory headwinds. The European Union plans to propose new rules on corporate taxes by next spring, cracking down on loopholes that internet companies have exploited to save billions of dollars in taxes over the years.

Company-specific problems have also popped up, particularly for some of sector's biggest names. Apple ($153; AAPL) has fallen 6% since August on reports of soft iPhone 8 demand and ongoing production delays for the iPhone X that could pose a risk to the holiday-selling season. Facebook ($168; FB), down 2%, has come under intense scrutiny for selling political ads to Russian-backed groups during the U.S. presidential election. Executives from Facebook, Twitter ($18; TWTR), and Alphabet ($967; GOOGL) have been asked to appear before a Senate committee next month. Ultimately, these digital companies could face new disclosure requirements for political advertisements.

Yet fundamentals still point in tech's favor. Of the S&P 500 Index's 11 sectors, only technology has seen its September-quarter profit estimate rise since July 1, now projecting 12% per-share growth. Profit estimates are also rising for the December quarter and 2018, with the consensus projecting 12% growth for both periods. By comparison, the S&P 500 Index is expected to grow profits 6% in the September quarter, 12% in the December quarter, and 11% in 2018.

Compared to historical norms, the sector's valuations still look reasonable. The average stock in the S&P 1500 Index trades at 25 times trailing earnings, 16% above its 20-year average of 21.5. The average technology stock trades at 28 times trailing earnings, just 2% above its 20-year average. Only the consumer-discretionary and real estate sectors look more attractive relative to their own historical norms.


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