"The biggest statistical bargains tend to be the most controversial," said Howard Ward, a money manager at Mario Gabelli's Gamco Investors Inc., which oversees $35 billion in Rye, New York. "So far, momentum investors have not taken the bait. They are waiting for more evidence of a turn in the cycle. It will come, but timing the inflection point is murder." His firm owns Mountain View, California-based Google and Qualcomm Inc. in San Diego.
Recovery Concern
Investors tend to move money from one sector to another in anticipation that some industries may profit more in a certain stage of an economic cycle. Technology companies trailed the market this year after posting the third-worst performance in 2010. The stocks have suffered in a rotation into companies whose earnings are least-tied to economic growth amid concern the U.S. recovery is slowing.
The shift has pushed the size of stock swings for computer and software makers to an almost-three-year peak. The S&P 500 Information Technology Index's 90-day volatility relative to the S&P 500 rose to 1.23 on April 25, matching the level on April 14, 2010, which was the highest since July 29, 2008, less than two months before Lehman Brothers Holdings Inc.'s bankruptcy, Bloomberg data show.
Microsoft is worth owning because of the income it generates, said Channing Smith, a money manager at Capital Advisors in Tulsa, Oklahoma. The stock offers a dividend yield of 2.68 percent, compared with the S&P 500's payout ratio of 1.92 percent, data compiled by Bloomberg show.
'Income Play'
"It's a very good income play," said Smith, whose firm manages over $900 million. The company had $50.2 billion in cash and short-term investments on March 31, compared with $11.9 billion in long-term debt, according to a government filing. "Their balance sheet is unbelievable," Smith said.
While the pace of hiring in the U.S. is slowing, American companies may spend more on automation to cut costs, said Smith of Capital Advisors. U.S. productivity, or employee output per hour, rose 3.9 percent last year, the most since 2002, according to Labor Department statistics released in March. Worker costs fell 1.5 percent following a 1.6 percent decrease in 2009, the first back-to-back drop since 1962 and 1963.
Corporate spending on equipment and software will increase 10 percent this year, compared with U.S. gross domestic product growth of 2.5 percent, according to Bank of America in Charlotte, North Carolina. Technology companies derive 60 percent of their sales from business spending, the highest portion among S&P 500 industries, the firm estimates.
"We are fans of the capital-goods sector," said John Kattar, chief investment officer at Eastern Investment Advisors in Boston, which manages $1.7 billion. "Technology continues to get cheaper. It will outperform because of the recovery in capital spending."