11/22/2011 2:55 PM ET|
Are tech stocks the new safe haven?
A core feature of defensive tech companies is that they have lots of cash. This reduces risk of bankruptcy or having to raise cash on terms that water down the value of their stock.
The numbers tell the story. Overall, tech companies have more cash than any other sector in the Standard & Poor's 500 Index ($INX). Tech-sector companies have cash worth 18% of their market cap, according to Standard & Poor's. The next-closest sector is health care, with 16%. All other sectors are at 10% or below.
And a strong cash position is a key feature of the five defensive tech plays I'm citing here. Apple, for example, has $28 billion in cash and short-term investments, and an additional $48 billion in long-term investments, according to Morningstar. The company has no debt. Intel has about $15 billion in cash; IBM has about $11 billion; EMC has around $4.7 billion; Cognizant has around $2.3 billion and no debt.
A big part of the reason tech companies have so much cash is that for most of them, their main assets are their employees, as opposed to expensive factories and equipment, says Jeffrey Provence, who manages the Wireless (WIREX) fund. But the defensive tech companies I'm citing here also have a lot of green, because they all produce so much cash flow. This is partly due to high profit margins, typical of tech companies and also a defensive characteristic. After all, with high profit margins, it's easier to continue making profits during a downturn.
But our defensive tech plays also have strong cash flow because big parts of their businesses produce recurring revenue, another safety feature of these companies. Buy one Apple device, for example, and you get drawn into the Apple ecosystem so the next time you buy a new device, it's likely to be an Apple, since going to a competitor is a hassle.
Because IBM sells mainframes, servers, storage systems, business software and chips, it also tends to lock in customers, which is probably a quality that attracted Buffett to the stock, says Lowenstein. "IBM is a safe-haven investment, given the high recurring revenue," he says.
About 80% of the revenue at Cognizant is recurring revenue from services such as maintenance, says Swami Shanmugasundaram, who follows the company for Morningstar. Similarly, EMC enjoys repeat business because companies design their entire datacenters around EMC software and hardware -- and that is not a decision they are apt to change from year to year, says Michael Holt of Morningstar. "There is a built-in customer loyalty," he says.
Next, the companies on our defensive tech list look fairly secure because they do so much business around the world, so they aren't exposed to any single business cycle. While the economy in the U.S. or Europe may be weakening, there's still robust growth in emerging markets like China, India and South America. This helps explain why, during the last recession, earnings and cash flow declined less at many tech companies compared with other sectors, says Swanson.
Aside from Apple, which says that 61% of its sales come from outside the U.S., tech companies don't necessarily reveal how much of their sales originates overseas. And it's hard to determine anyway, since computer chips sold in the U.S. by Intel may eventually wind up in products bought overseas.
But it's safe to assume that tech giants like Intel and IBM do lots of business abroad, and the big-picture numbers confirm the story. U.S.-based tech companies get more revenue from foreign lands than any other sector in the S&P 500. Last year, tech companies got 56% of their revenue abroad, while the runner-up, materials, got 52.5%, says Howard Silverblatt of Standard & Poor's. All other sectors got less than 50% of their sales abroad.
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Tech stocks...really! This is the way out? Are there not more pressing things to be addressed. Europe is collapsing under insurmountable debt and two dictators have been installed in place of elected officials. Housing continues to fall. The stupid committee could not agree to cut 1.2 trillion (peanuts) over a TEN YEAR period on a debt that is currently 15 TRILLION. Bernanke is echoing thoughts of QE3, another round of make believe stimulus to borrow more from the dwindling tax payers to pay the interest on what already has been borrowed. How has this worked so far? Corrupt politicians, captured media, an attorney general that refuses to prosecute a fraudulent banking system and there is so much more, but people seem to be happy watching NFL and Dancing with the Stars. I think some real honest talk on how to prepare one's self for the 2nd great depression would be in order.
iowaview; It's not a left, right thing, both parties are money whores and both are owned by the lobbiests and banking cartels. The key would be to separate the money from the politics (not an easy task, but doable). Once you get rid of the central bankers the system could work again. We've become a government for the banks, by the banks and of the banks.The Federal Reserve is the cancer that just keeps on growing.
Doug: can't argue with what you pointed out..and my comments were meant to be global as today's issues will effect the entire world.
so much for tech stocks.............??
I think some real honest talk on how to prepare one's self for the 2nd great depression would be in order.
Fastback49 .. Looking around the world, I think more than "just one's self" ought to be in on the conversation, about what to do with the adjustment in these depressing financial times. The sad part about watching things unfold, is that It could have been prevented with bold measures from some statesman in Congress (fiscal policy) .. and some common sense in Europe instead of the picket fence attitude.
I don’t see a whole lot of upside in the tech sector for quite some time. I only see huge amounts of risk. Oh, well where fools rush in. Knock yourself out, but when labor shortages cap growth, skyrocketing labor costs sap earnings, bitter labor strife affects production schedules, and other mismanagement whip saws your tech portfolio in comming years don’t say I didn’t tell you so.
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