Tech stocks have mostly underperformed in 2013 thus far. Apple (NASDAQ:AAPL) is the obvious example, down 14% since Jan. 1, but it’s not alone.
The iShares Dow Jones U.S. Technology ETF (NYSE:IYW) is up just 6% so far year-to-date, just half the market, and IBM (NYSE:IBM) has performed about the same. Chipmaker Qualcomm (NASDAQ:QCOM) is up only 4%. Enterprise giant Oracle (NASDAQ:ORCL) and social media king Facebook (NASDAQ:FB) are both barely above break-even YTD.
But this might change soon — tech could go on a tear in the coming months in anticipation of bluer skies ahead for the sector. Here are five reasons why:
Big Returning Capital: Again, Apple is the obvious culprit here with its $100 billion plan to return capital to shareholders via dividends and buybacks through 2015. But Qualcomm just upped its share repurchase plan sixfold, from $10 billion to $60 billion. And after announcing its first dividend ever in 2011, Cisco (NASDAQ:CSCO) now yields more than 3% thanks to recent dividend increases.
Valuations Are Fair to Cheap: Tech stocks are traded at unprecedented discounts, with the forward price-to-earnings multiple of major tech stocks in the S&P 500 at just 13 — the lowest level since 2006, according to Bloomberg.
Corporate IT Thaw: In a recent survey, some 43% of hospital execs project higher IT spending in 2013. This mirrors a broader trend reported by Gartner research, which predicted “moderately accelerated” growth this year, particularly in the device market.
Select Techs are Soaring: While some big-name stocks are suffering, a number of niche plays are not. Take Arm Holdings (NASDAQ:ARMH), the mobile chip designer that just hit a 13-year high and is up 31% year-to-date. Clearly there is some potential in the sector if you know where to look. And even some long-hated stocks that are admittedly facing some problems right now in the mobile age — I’m talking about you, Microsoft (NASDAQ:MSFT) and Hewlett-Packard (NYSE:HPQ) — have firmed up remarkably on newfound optimism. This could hint at broad-based strength to come for the entire sector.
Defensive Sectors Will Fade: The rally thus far has been led by very defensive stocks like consumer staples. However, as the Dow Jones and S&P recently pushed to new highs, there was a clear rotation out of the defensive issues and into faster-moving sectors like financials and, of course, tech. If you believe the rally will hold, then you have to believe it is going to be fueled by more than just packaged foods and consumer goods.
- Chart-watcher Sam Collins says the Nasdaq is breaking out. (InvestorPlace)
- Tech stocks are at their cheapest prices in seven years. (Bloomberg)
- Four tech stocks with long-term earnings growth. (Investors.com)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.