Preference for technology and financial stocks (page 1 of 3)

Defensive sectors continue to underperform, implying that investors' risk appetite is increasing. This favours our preference for technology and financial stocks.


US Stocks

In a recent Technology Review publication, it was reported a MIT graduate built the "perfect mirror" - one that reflects light from all angles with negligible absorption. In theory, a mirror-lined coaxial cable can carry light of higher intensity and a broader bandwidth, transmitting up to 1,000 times more data than fiber optics. According to the inventor of the technology, we are getting closer to the capacity of the conventional optical fiber in a few years time.

In addition to transmitting more data, the new cable could eliminate the need for signal boosters every 60 to 80 miles. And, unlike the fiber optics, the cable will have no trouble transmitting light around sharp bends, allowing the cables to be miniaturized to the scale of the tiny optical switches being developed for the optical Internet.

Does this development spell the end of the fiber optics and boosters manufacturers? Not necessarily, because there is the question of legacy. It is economically not feasible for client who has already committed to the fiber optic technology to change every time a new technology comes up. Furthermore, the above-mentioned innovation has yet to attain commercial viability, and therefore, profitability.

In this fast pace of technological innovation, today's technology will be rendered obsolete in the not too distant future. But this does not mean the best technology will always wins out. Witness the case of Microsoft's operating system and the Linux, and perhaps the most famous example - the Sony Betamax against the VHS.

We have to be aware that we tend to be mesmerised by what the new technology promised it could do. Rather, one should not neglect the management record/leadership, diversity of existing product lines, balance sheet, earnings and valuation (given a reasonable future growth rate).

The purpose of this exercise is to look for fundamentally sound companies in an oversold situation. And with the stocks from our buy list particularly in mind, I have come up with the following. The idea is to treat these stocks as a separate asset class a recovery situation. The performance from the beginning of last year have ranged from -37% to -65%, and depending on client's risk appetite & time frame, 10% to 15% of the portfolio should go into these stocks. Then wait out the next 18 to 24 months for them to recover along with the business cycle.

The list represented different sectors of technology - software, cellular phone & telecom chip, telecom service, content provider, & computer manufacturer. At current levels, a little bottom fishing is in order for these stocks.


US Technology Stocks

After three consecutive "up" days on NASDAQ, the market took a pause on Friday as investors prepared for the long weekend (holiday on Monday to mark Martin Luther King Jr. Day). On a week-on-week basis, the NASDAQ Composite Index gained 9% to settle the 2nd trading week of the new year at 2626 (+6% year-to-date performance). Looking into the week ahead, we expect profit results from preferred tier one technology companies to set the pace for 1H01 investments into technology stocks. We expect volatility to be high and as such, we do not recommend buying these stocks during this "noisy" period.

Gateway's (GTW US, $21.10) and Hewlett-Packard's (HWP US, $30.69) weak earnings announcement last week will continue to dampen sentiment for related computer hardware stocks.