For months, one-time market darlings in the technology sector have been shunned, spurned, and outright shorted. The group has underperformed the market as investors focused on commodities, materials stocks, energy holdings, and emerging market issues.
The terrible earthquake and nuclear disaster in Japan caused supply chain disruptions for the tech industry since manufacturing of vital components — from aluminum capacitors to LCD polarizer films — is dominated by the Japanese.
But now, factories are restarted, power restored, and radioactivity appears to be brought under control. RBS chip analyst Jack Lu notes that the supply chain is already “mentally prepared for the worst” out of Japan. And that leaves room for upside surprises.
The Japanese press is reporting that Renesas, Japan’s number one automotive semiconductor manufacturer, is going to re-open one of its fabrication plants one month early. And Mitsubishi Gas Chemical announced that it expects to restore production to pre-earthquake levels by early May. MGC makes the Bismaleimide-Triazine epoxy resin used to make circuit boards.
And that means investors are slowly returning to the sector.
In fact, tech stocks are the only cyclical group showing any momentum at the moment. Given that we’ve yet to see any of the signs of a major market top, we must assume that we’re near the tail end of a typical correction within a long-term uptrend. And that means that tech stocks should lead the way out of the multi-month funk the stock market has been stuck in.
Look at what happened on Thursday.
First, bears tore into the group after some weak Q1 PC sales data was released by research firms IDC and Gartner. The culprit is the growing popularity of tablet devices like the iPad.
But the buyers swooped in and cut the sector’s losses — after all, business IT departments are big spenders on PCs, and sales are picking up as hiring slowly moves higher and IT budgets are restored. Indeed, when Dell (NASDAQ: DELL) reported results back in February it noted that enterprise solutions and services revenue was up 27% for the year while consumer sales played a smaller role.
My favorite pick in the sector right now is Agilent Technologies (NYSE: A), a maker of testing and measuring equipment for the electronics, chemical, and health care industries. Shares were higher on Friday, moving out of a five-month consolidation pattern on heavy volume. I expect big things from Agilent in the days and weeks to come.
International Business Machines (NYSE: IBM) also looks attractive at current levels as it prepares for a breakout of its own.
For the risk takers out there, IBM would make attractive option plays since it has good volume and trends to be a low volatility issue that trends well. I would look at the at-the-money IBM May $165 Calls, which were up Friday.
Disclosure: Anthony has recommended Agilent and IBM to his newsletter subscribers.
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