Tech sector emerges as bright spot in gloomy market

The pain from a punishing 2008 has lingered this year if you’ve got a well-diversified portfolio: The Standard and Poor’s 500 index is down 5 percent.

But look at the year-to-date numbers for a trio of tech titans: Apple Inc. has surged more than 40 percent, and IBM Corp. and Google Inc. are both up about 21 percent.

And the tech sector broadly? So far this year, tech mutual funds are the top performing domestic stock fund category, up nearly 10 percent, according to the investment analysis firm Morningstar. On the other end of the spectrum, financial services funds lost nearly 16 percent, followed only by real estate funds, down 25 percent.

What’s going on? If the market has hit bottom, it’s the tech stocks that are leading a comeback — a reversal from the last time a recession set in, when the dot-com bust sent the broader market reeling.

Plenty of industry analysts and fund managers are confident that tech’s recent gains have plenty of staying power. They point to strengths that will help tech companies endure and even prosper amid this recession.

Most are insulated from the slowly easing credit crunch because they have clean balance sheets and little or no debt. They’re also accustomed to making cuts to stay afloat in an industry known for its dizzying pace of product upgrades, price reductions and efficiency improvements.

And while the dot-com bust forced tech companies to hone their strategies so they could ride out the resulting recession, banks were seemingly operating in a different environment.

“Tech companies really fell off a cliff, while the financial companies were still booming and generating mortgages,” said Andrew Silverberg, a portfolio manager with the Alger Large Cap Growth fund. “The tech companies have a playbook for how to get through a recession.”

Alger’s fund is up about 3 percent this year, thanks in part to gains for two of its top five holdings: Apple and Google.

Those two stocks also are among the top five at the Jacob Internet fund, which has gained nearly 15 percent so far this year.

The fund’s manager, Ryan Jacob, said Apple and Google are both so strong in their niches that they can expand even when a recession cuts into their specialty markets.

“In advertising, Google continues to take a larger piece of the advertising pie, even when advertising has been contracting on a whole,” Jacob said.

In normal times, such companies might enjoy revenue growth of as much as 30 percent per year.

“Now, even in a declining economy, they can still grow in the double-digits,” Jacob said. “Maybe it’s just half the rate they’re accustomed to, but the fact that they are still growing in this economy is why you are seeing so much investor interest in tech.”

Another enticement for tech investors is the stash of cash that many tech companies are now holding. Eventually, Jacob said, many tech firms will resume buying back their own shares, which should drive tech share prices up further.

A big hurdle for tech companies is their corporate clients’ reluctance to spend cash amid the credit crunch. And with corporate tech spending dwarfing consumer tech spending, the corporate market is hugely important.

Nevertheless, tech consultants like IBM have fared well lately because their clients are typically able to afford paying for tech services on an as-needed basis, despite the credit troubles, said Andrew Bartels, a Forrester Research technology analyst.

That’s in contrast to capital spending on computer hardware like servers or laptops. Hardware purchases can often be put off until the economy turns around, and typically carry big upfront costs that may not pay off for years to come. These days, companies are more inclined to rent equipment to limit short-term expenses.

Recently, Cambridge-based Forrester Research lowered its forecast for U.S. tech spending because of the worsening economy. Forrester now expects U.S. business and government spending on technology to fall by 3.1 percent this year.

“Companies are scared to death that they can’t borrow if they need to, so they are doing everything they can to hoard cash,” Bartels said.

That has hurt tech hardware vendors like Hewlett-Packard Co., whose stock is down about 5 percent this year, and Dell Inc., up a comparatively modest 5 percent.

But aside from the hardware suppliers, tech’s appeal is so broad now that many fund managers who usually focus on value stocks of established companies are looking afield. They’re considering pricier growth stocks, especially tech firms.

Kent Croft’s Croft Value Fund is slightly outperforming the broader market this year, with a 3 percent decline. He’s been buying shares of Cisco Systems Inc. lately because he sees strong prospects for Cisco’s computer networking gear that serves as infrastructure for the Internet.

The big build-out of broadband capacity that began in the 1990s has slowed in recent years. Croft expects demand for more infrastructure will expand as Internet use and traffic from video downloading continues growing despite the recession.

“Buying Cisco is a way to broadly participate if you buy into the growth of broadband,” Croft said.

But with the economy still stumbling, it’s important to remember that not all tech companies will quickly gain traction — particularly those relying heavily on customers’ willingness to spend freely again. But once the economy turns around, tech appears set to broadly prosper.

“Corporate tech clients will realize, ‘Hey, we’re sitting on a ton of cash here,’” said Bartels, the Forrester analyst. “So they will turn around and invest in tech, because that is going to give them a better return than having cash sit in the bank and earn 1 percent.”

This year, Bartels said, “is really going to set the stage for a strong recovery in 2010, when tech is going to grow significantly faster than the broad economy.”

(Associated Press)