Rebound for Tech Stocks?

by Alan Lavine and Gail Liberman

We keep hearing Jim Cramer on CNBC-TV’s “Mad Money” hyping tech stocks. Could they finally be headed for the comeback trail?

It sure looks promising. In the second quarter of this year, tech stocks gained 8 percent. In addition, dividend payments, though small, increased 44 percent over the past two years, according to Standard & Poor’s.

After trailing the broad market over the past several years, some analysts believe current tech stock prices look cheap, and they expect tech stocks to rally.

“Technology companies are currently attractively valued on a historic basis as well as relative to the market as a whole,” says Michael Sola, manager of the T, Rowe Price Science and Technology Fund.

But technology stocks have a long way to go before they make back their bear market losses. The average technology stock fund lost -37.62 percent annually over the three-year bear market that ended in 2002.

The problem today, as analysts see it:  Technology companies have high operating margins.

Sola believes, however, that during the first half of this year, consolidations of tech companies helped the sector and should accelerate.

He cites Adobe Systems’ acquisition of Macromedia and Sun Microsystems’ purchase of Storage Technology.

Consumers are embracing new products, such as high-definition television and cell phones with video capability, he says. Demand for broadband also should generate demand for upgraded communications equipment.

Edward Yardeni, chief investment strategist for Oak Associates, Akron, Ohio, favors the semiconductor equipment sector, and expects strong earnings growth in 2006.

“The fundamentals are still weak,” he said. “However, the stocks may be starting to anticipate a cyclical upturn in orders.”

Other money managers, however, are not convinced.

“With interest rates threatening to rise, the U.S. stock market is too vulnerable for a longer-term technology investment,” says William Donoghue, editor of MarketWatch’s Proactive Investor.

And Amy Arnot, a Morningstar financial analyst, cautions that there are a number of overvalued tech stocks that should be sold.

Bottom line: Some tech stocks may soon rebound, but don’t bet the ranch on any particular sector.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.