“Boring Tech” Could Replace V, MA, AAPL as Market Leaders
August 6th, 2008 by 
James Cullen
Who Shot the Market Leadership?
One of the nice fringe benefits of spending a lot of time reading financial blogs is that you get a better sense of sentiment toward certain stocks than can be conveyed in the media or by a chart. This is mainly beneficial with what I call “site stocks” - stocks that have fans with so much free time on their hands to justify building a site around the obsessive discussion of the daily trading of one stock. Because I have the odd tendency to be cautious in situations where there is enough bullish sentiment to create a situation like that, I also tend to hear it personally from those people - namely the Visa (V) and Apple (AAPL) fans.
In this video from TheStreet.com, Jim Cramer talks about how the momentum hedge funds think - I find it fascinating that there are funds out there who can simply put money to work on the thesis that a stock is going up, so it’s correct to own. Of course, the flip side of that is once the stock tops out, there’s a rush to the exits. Cramer says that this is what’s happening in MasterCard (MA) right now; I continue to maintain that MasterCard and Visa are much more exposed to consumer credit than people realize.
Likewise, AAPL hasn’t been the market leader many expected it would be, and the stock has struggled to find its footing after earnings. The market has decided that Apple is much more of a consumer stock than a tech stock - the right placement, in my mind - and the big funds don’t seem willing to take it up past 35x earnings. This seems like as much of a market issue as an Apple issue, the excitement that once existed doesn’t seem to be there, and I’d once again say that I’m very neutral on the stock. Much better companies that are true tech names to bet on, if one is looking to make an allocation there…
Not All Tech is Equal
By tomorrow’s close, it’s likely that the four names here will all have handily outperformed the S&P and Nasdaq over the last six month, with only Cisco (CSCO) roughly in-line.
After Cisco’s earnings this afternoon, the stock was up 7% in after-hours, and a cursory review of the data they provided throws some cold water on the idea of a global recession. As Eric Savitz notes, pretty much every foreign market showed “strong double-digit growth” and CEO John Chambers surprisingly suggested that customer contacts tell him the economy will begin to turn up early in 2009. This bodes well for bringing some momentum (it isn’t all bad!) back into tech names and pressing onward with the rally.
Barron’s had a positive write-up on Accenture (ACN) a few weeks back, saying that they’re actually benefitting from the poor economy because firms are hiring them to manage additional outsourcing and headcount reductions to save costs. I stand by Accenture; they’re performing well and don’t have the headwinds pretty much every other company seems to be facing - not to mention, earnings estimates have been coming up lately. How many times can you say that?
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August 6th, 2008 at 6:17 am
Well, that’s the question, isn’t it? If the market buys the Cisco thesis that recovery is around the corner all that money coming out of energy and mining will go into tech. I’m not that convinced, so I’m still mostly in health care like the CROs (most still within a few percent of their highs) and diagnostics testing, where there’s estimates going up and little pain from the economy. If the Cisco thesis does take hold, though, I’d first jump into tech that has held up during this downturn, laser stocks like IIVI, engineering software like ANSS (dependant on its earnings this week); at least in these stocks, I can make the case that even if the recovery takes awhile longer, their fundamentals will still be OK.
August 7th, 2008 at 9:52 am
Looks like staying with the CROs was a good move; pretty much all the major ones, CVD, ICLR, PRXL are breaking out to new all-time highs this morning. ANSS had good earnings, as well.
August 7th, 2008 at 8:32 pm
An investing exercise that I do on occasion and happened to pick up again at a fortuitous time is using Marketocracy.com to manage a virtual portfolio… because I happened to check this in mid-July, I added massively to PRS and PRD, as I was doing with my real money. Since those have risen so much, I’ve breached the concentration limits and needed to reallocate dollars. I chose to buy some of the CROs you’ve been talking about - just enough to get compliant again - and today I see the database has crashed. An omen?
On a more serious note, it seems like you’re saying that the defensive plays have become energy and mining; how much longer do you think that idea holds? From the stocks there I watch, sector strength looks spotty and the old leaders like Freeport McMoRan (FCX) seem to be getting kicked aside.
August 8th, 2008 at 9:56 am
I think energy and mining are the old momentum plays, and lately the momentum seems to be drying up; and that momo money has to go somewhere.
The CROs have had a huge run, so I’d be cautious on them here, as well (especially after PRXL’s huge move yesterday); ICLR now trades at a 40 p/e, so it’s much tougher to make the case to buy it here. The thing with bear markets is that as fewer and fewer sectors are able to post decent numbers, leadership narrows and the momentum money tends to follow whatever is working. That’s been the CROs; but, if the Cisco thesis catches on, money could come out of them and into tech. I’d just feel safer chasing tech that’s held up well in the tough economy.