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Time to buy tech stocks now Add to ...

Some of the world's largest technology companies have been delivering record financial results, only to see investors cash out and head to the exits.

The rapid selloffs raise the question of whether short-term expectations have become too high for the sector. But they open up opportunities for investors with a longer-term perspective, say analysts.

Apple Inc. and IBM Corp. were the latest players to feel the sting of critical investors on Tuesday.

Apple boosted third-quarter sales by 67 per cent and profit by 70 per cent from a year earlier, blowing past analysts' forecasts. But the company said gross margins, or the percentage of revenue left after production costs, declined to 36.9 per cent from 41.8 per cent. Worse, Apple guided future gross margins down to 36 per cent, compared with analysts' average estimate of 39 per cent, and predicted profit of $4.80 (U.S.) a share for this quarter, short of the $5.03 anticipated by Wall Street. In response, the shares fell 3 per cent.

IBM also topped revenue and profit forecasts and increased its guidance for share profit this year. But the company said the amount of new service contracts decreased by 7 per cent last quarter. Investors drove the share price down by 3 per cent.

Last week, shares of Intel Corp. , the world's largest chip maker, fell 3 per cent even after the company said profit rose 59 per cent and sales climbed 18 per cent. Intel management provided an upbeat outlook, but failed to alleviate analysts' concerns that PC sales are slowing down.

The combination of strong financial results with falling stock prices suggests to some observers that investors are setting unrealistically high hurdles for tech companies. "Any time companies show strength ahead of their earnings reports, it just heightens the hurdle for them," says Bill Kreher, senior technology analyst with Edward Jones & Co. in St. Louis, Miss.

Attractive Stocks

For now, he sees falling stock prices of IBM, Intel and Apple as buying opportunities. "In the long-term, tech equities still look quite attractive," he says.

Maynard Um, an analyst with UBS Securities, shares part of that view. He notes that Apple has one of the strongest product release line ups in the industry. In addition, its latest products are making inroads into the "enterprise," or corporate, market long dominated by its rival Research In Motion Ltd. More than 80 per cent of Fortune 500 companies are deploying or piloting iPhones and 65 per cent of Fortune 100 companies are using iPads, he wrote in a research report. "We see the pullback as opportunity and reiterate our buy rating."

Mr. Um is one of 47 analysts following Apple who rate the stock a buy, compared with just four who rate it a "hold." He has raised his price target to $365 from $350.

The technology sector remains more volatile than the overall market, but the extent of that volatility is decreasing as tech companies mature, their earnings become more predictable and they begin paying dividends, Mr. Kreher says.

Between 2000 and 2005, volatility of tech stocks as measured by the standard deviation of monthly returns was 10.3 per cent, compared with the S&P 500 index's 4.5 per cent. Between 2006 and 2010, tech's volatility decreased to 6.1 per cent, compared with 4.9 per cent for the broader market. Five years from now, the volatility gap is likely to have vanished, Mr. Kreher says.

Tech stocks no longer move as a group, but reflect the fortunes of specific industries. The best performing group within the S&P North American technology index has been Internet stocks, up 26 per cent over the last year. Prices of hardware companies have risen 15 per cent and software issues 13 per cent. Technology services stocks have lagged, up just 2 per cent, and semiconductor issues are down nearly 2 per cent.

Upcoming earnings

Wednesday, Oct. 20


Seagate Technology

Thursday, Oct. 21

CA Technologies


Citrix Systems


Monday, Oct. 25

Texas Instruments

Tuesday, Oct. 26


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