Pieter Schop, senior portfolio manager of the Information Technology fund at Dutch-based NN Investment Partners (NNIP), believes valuations remain attractive. He runs a fund dominated by US tech giants such as Apple, Microsoft, Google’s Alphabet and Germany’s SAP.
“We think valuations are aligned with growth prospects,” says Schop. “And we see the recent correction as nothing more than profit taking and not driven by fundamentals. Technology shares trade only at a slight premium to the market and at nothing like the levels we have seen in the late ’90s.”
Roaring performance
The spectacular year for tech stocks reached its peak on 8 June when the Nasdaq Composite Index in the US hit an all-time high of 6,321.76. It has since retraced some of those gains, but still ended the first six months of the year with a rise of 14.1%, which was its best first-half rally since surging by 43.9% in the first half of 2009.
In July, the index continued to drift lower but has not suffered any sharp falls, leaving Schop content that there is no fundamental change in direction likely.
“Due to the outperformance and investors’ interests, a lot of money has flown into this sector, which makes it a bit more volatile than it has been. However, we view these setbacks as buying opportunities, rather than bubble territory,” he says.
In the medium term, Schop believes the earnings outlook for the tech sector will remain strong for the foreseeable future.
“In an environment of low economic growth and deflationary pressures, growth stocks will continue to perform well due to their scarcity value. Furthermore, valuation of technology companies is attractive compared with the growth potential, innovation is abundant, balance sheets are strong and earnings momentum remains good.”
Schop says the growth in earnings by tech stocks has been better than the broader market for the past 10 years, driven largely by such things as mobile phones developing from a $50 calling and texting device to a $500 mobile supercomputer.
New markets
A key reason for the sector’s likely future growth, he says, is the transformation technology is bringing in areas as diverse as autos, healthcare and retail.
“We are convinced that the longer-term prospects for the technology sector remain bright as it will continue to play an important role in productivity gains within the broader economy.”
Even for parts of the tech sector that regularly succumb to cyclical pressures, Schop says there is little to worry about.
Semiconductor makers, for example, often experience boom-bust periods and many firms in this market participated in the share price rises seen in the first half of the year. Indeed, the Philadelphia Semiconductor Index, which tracks many of the top names in the sector, rose by almost 50% in the 12 months to 30 June.
“With these stocks, you have to be cautious when you have had an extended period of outperformance and of superior earnings growth,” warns Schop. “We think the underlying secular trend is so strong that we can have a cyclical setback, but it will be relatively small and more of a buying opportunity.”
In the current environment Schop likes the semiconductor space. He believes current market levels do not reflect the prospects for many of the firms in the sector.
“If you look at the semiconductor content in cars, for example, it’s currently at $30 on average, and we expect it to go to $300 in five years’ time.”
In this sector, Schop likes Lam Research, which makes equipment and provides services for semiconductor manufacturing; KLA-Tencor, a supplier of process control and yield management systems for the semiconductor and nanotechnology industries; and Xilinx, primarily a supplier of programmable logic devices.
“We like to play the picks and shovels, and we think that the semiconductor firms are a good way to play a lot of themes, such as cloud computing, the internet of things and automotive changes.”
