As technology giants report strong earnings and robust sales guidance, exchange traded funds (ETFs) which track the sector are poised for growth and could pose an opportunity.
As the U.S. economy starts to stabilize, business are expected to upgrade software and hardware, which were one of the first things to be postponed during the Great Recession as cost cutting efforts took precedent. According to market research giant, IDC, sales of hardware are expected to rise by 6.4% and sales of software and technology are expected to jump 3% this year, to upgrade servers, workstations, networking gear and storage systems.
To further boost appeal, increases in global personal computer sales will help bolster revenues. Shipments of PCs are expected to rise 22% this year as many buyers bypassed Windows Vista and demand in emerging markets, fueled by an increase in personal wealth, is ballooning.
This increased demand will likely make Microsoft (MSFT) a clear winner as the company has already sold nearly 150 million copies of Windows 7 since its debut and the software is expected to be found on nearly 9 in every 10 personal computers around the world.
Other companies likely to reap the benefits of robust guidance in the technology sector include Oracle (ORCL), which recently acquired server manufacturer Sun Microsystems, and the world’s third-largest PC maker, Dell (DELL). The Austin, Texas based company is anticipating revenues to rise by 19% in 2010.
In addition to increased revenues and sales growth, the fundamentals of the technology sector remain strong. The sector as a whole has a healthy balance sheet with excessive cash reserves and boasts a five year PEG ratio of 1.1 which indicates that the value on the expected growth of the sector is prevalent.
Some ETFs influenced by these trends include the following:
- the Technology Select Sector SPDR (XLK), which give exposure to Microsoft, Oracle and Dell. XLK closed at $21.15 on Wednesday.
- the Software HOLDRs (SWH), which allocates 19.74% of its assets to SAP (SAP), which is expected to witness sales growth of 7%, 18.94% of its assets to Microsoft and 14.10% to Oracle. SWH closed at $38.01 on Wednesday.
- the iShares Dow Jones US Technology (IYW), which gives exposure to Microsoft, Oracle and Dell. IYW closed at $53.58 on Wednesday.
Although an opportunity exists in the technology sector, it is equally important to keep in mind the inherent risks involved with investing in the sector. To help protect against these risks, the use of an exit strategy which identifies specific price points at which downward price pressure is likely to be eminent is important.
According to the latest data at www.SmartStops.net, these price points are as follows: XLK at $20.24; SWH at $36.73; IYW at $51.11. These price points change on a daily basis and are reflective of market volatility.
Disclosure: Long IYW