While the valuation of technology stocks are at the lowest they’ve been in a decade due to larger economic and market factors, this trend can be misleading to investors worried that tech has entered a speculative bubble.
In 2011, profits for tech companies will rise 35% faster than the S&P 500 Index (NYSE:SPY). Technology (NYSE:XLK) profits totaled $135.6 billion last year compared to $72.9 billion in 2000 when the S&P Information Technology Index was at its highest. Corporate expenditures on technology such as software and computers is expected to increase 10% this year, four times faster than GDP, while corporations making up 60% of tech purchasing. Per-share earnings for tech companies will rise 24% this year as opposed to the 17% increase for the S&P 500.
But after the government reported the worst jobs data in eight months last week, and many retailers reported revenue below expectations, the S&P dropped 2.3% while a group of computer and software makers including Microsoft Corp. (NASDAQ:MSFT) and Hewlett-Packard (NYSE:HPQ) lost 1.9% for May, down a total of 7% since February 17. The only other industry to experience a greater decline than that of technology was the financial sector.
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Still, it’s important to understand the risks involved. Not all stocks will necessarily bounce back from current rates leaving risky investors with a big payoff. Microsoft’s (NASDAQ:MSFT) price-earnings ratio has average 18.6, well below the 23.9 ratio for technology in general, returning 53% including dividends as opposed to 131% for the industry as a whole. Often times the bargains that have potential for the greatest payout are also the biggest risks for investors. And so far, investors aren’t ready to decide whether to take the chance, allowing tech shares to continue to fall, despite the fact that even Microsoft’s shares have a greater annual payout than the standard S&P.
There is also risk in buying in too soon. While you still may turn a profit in the long run, that profit may have been greater had you bought in at the inflection point when stocks were their absolute lowest. The hard part, of course, is determining that inflection point before stocks begin to skyrocket.
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