Technology stocks are being overweighted by portfolio managers with the sector seen as one of the fe...
Technology stocks are being overweighted by portfolio managers with the sector seen as one of the few set to deliver top-line growth in 2000.
Despite high P/E ratios on many technology stocks, fund managers are taking the view that these stocks will continue to outperform amid superior growth prospects. For example, software company Sage Group is trading on a P/E of 146.69 times while the P/E ratio for the FTSE 100 is at around 29.37 times. The Information Technology Hardware index is up 333.19% in the period between 1 April and 10 December this year.
Michael Felton, UK fund manager at Royal & SunAlliance Investment Management, says despite the high P/E ratios he wants to be overweight technology on a medium to long-term view. He adds that traditional P/E ratios may not be the best way to value these types of stocks, where much of the earnings potential could be several years away.
Felton prefers to use measures such as discounted cash flow to judge the valuations of technology stocks as this gives him the ability to include estimates of the potential earnings for these companies in five years time and further into the future. Royal & SunAlliance Investment Management is expecting earnings growth of 25% plus for the software sector next year.
He says: "As a house we are very overweight the IT area of the market and in particular on the software side. We are well positioned for what is happening in the sector with large holdings in software groups Logica, London Bridge Software and Sage Group, and we also hold hardware company Filtronic. In terms of the valuation on these types of stocks, we are in a position of strength because we own them already. Valuations are rich and demanding but the news flow continues to be excellent and earnings upgrades continue to be a feature of the sector. We can see there being a bit of a modest New Year correction but we do not see these stocks coming back that far. There may be a bit of profit-taking in technology stocks in the New Year correlating with the traditional rally in over-sold cyclical stocks at that time of year.
"However, the news flow for the technology sector will continue to be good and quite importantly the market as a whole seems to be underweight in these type of stocks. There is some latent buying interest out there."
London Bridge Software is on a P/E ratio of 225 times and its share price has risen by 305.84% in the 12 months to 13 December 1999. Filtronic saw its share price increase by 256.56% in the 12 months to 13 December and the stock is on a P/E ratio of 109.14 times.
Andy Carter, head of UK equities at Gartmore, is favouring IT companies such as Sage Group and Sema Group. Sage has seen its share price rise by 330.21% in the 12 month period up to 13 December 1999 while Sema Group, which is on a P/E of 102.87 times, has seen its shares rise by 118.18% in the same time period.
Carter says: "We are well-positioned in areas such as IT and telecoms. Our belief as a growth house is that you want to be in areas like this, which are some of the few where you are going to get top-line growth. We have been overweight this year and last year."
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