Fears of slowdown in the US economy have pumelled the shares of leading technology companies.
CSCO, APPL, GOOG, INTC and MSFT are trading significantly below (25-40%) their highs reached a few months ago.
A number of these stocks had done exceedingly well during 2007 so some of the pullback is expected. However the market has been very unforgiving about slower forecasts.
In the age of SOX, you expect CEOs to be very cautious about any future predictions.
Further, when the air-waves are full of doom and gloom prognostics about a recession CEOs can not go out and claim that everything is rosy.
However the market reaction is overdone.
Even in an economic slowdown, companies continue to invest in technology. This is because technology investments have a strong correlation with growth in productivity and companies can not get behind the curve for too long.
Further, inspite of the economic slowdown, corporate balance-sheets are still looking good.
The other big factor is that the technology companies have get a lot of their revenues from emerging markets.
And these segments are growing faster than ever. Cisco reported 24% growth in orders from emerging markets for the second quarter.
Though this number is smaller than the 35% growth reported in the first quarter, it is still a good number for a company as large as Cisco.
It is also clear that the in this election year the Congress and the White House will try their best to stimulate the economy.
The question is not whe ther
they will act but how big will the stimulus package be.
Efforts are underway to shore-up the financial system too and the Fed has finally realized that they were behind the curve and is aggressively cutting rates. Lower interest rates, higher confirming loan limits and programs to help distressed home owners will help cushion the effect of the negative HPA (Home Price Appreciation). So any recession in the US economy is going to be short.
A lot of investors still have painful memory of the burst of the technology bubble earlier in this decade.
However, the valuations then were astronomically high and bear little resemblence to the current situation. It is time to start buying the dips in the technology sector.
The valuations are compelling and the prognosis sounds much worse than it actually is.