The US software sector has seen share prices improve in recent weeks without any significant improve...
The US software sector has seen share prices improve in recent weeks without any significant improvement in fundamentals, warns Sean Daykin, US Growth fund manager for Norwich Union.
'Some stocks have rebounded from their lows with companies like PeopleSoft and Siebel Systems trading at around 60 to 65 their 2002 P/E estimates, more than doubling in value,' explains Daykin.
'People are expecting earnings to be up but they could be being overly optimistic as sales volumes remain low,' he says. 'In the critical corporate sector, many CEOs are requiring that authorisation for major expenditure in this area goes through them, causing delays in the ordering process. Oracle has seen an increase in demand and believes the downturn has bottomed out but other companies haven't really seen that. The US may have stabilised but Europe has only just started to see the effects of the slowdown. There's a real risk of profits falling even further.'
Daykin believes analysts have seen the US stabilise and have bid up prices, anticipating a recovery.
The Norwich Union US Growth fund is overweight in this area generally, says Daykin, but its exposure is based more in services companies like EDS or processing companies.
Nevertheless, he does believe it is possible to find growth stocks, particularly in the processing sector. He likes Amdocs, a specialist billing company that provides integrated customer care for wireless and wireline network operators, currently trading at a P/E ratio of 33.
'Right now, we're not aggressive at all on US software companies, although we do like the sector long term as companies are spending more on IT,' he says. 'There is currently a lot of downside risk associated with the sector and not much upside.'
Greg Kerr, manager of the M&G Technology fund, believes customers are aware that software company managers are desperate to hit quarterly targets and are using this as a bargaining chip.
He says: 'Customers want the new software but they are in no rush to get it. IT budgets are already bloated after the past 12 months and companies are looking to reduce costs. They want to pay the lowest amount possible and are waiting till the last minute to get a better deal.'
The underlying trend, he says, is that companies of which analysts had low expectations are outperforming, while those companies that were expected to do well have underperformed.
Among those that are doing well are the big integrated players such as IBM and mainframe software makers such as BMC Software, Kerr adds.
He says the problem in selecting stocks in this sector is that it is a winner take all market.
'Losers in the software market don't just lose market share, they go to the wall,' he says. 'I think in the current climate, owning proven winners is a better strategy than going with new entrants.
'We have quite a heavy weighting in Microsoft at the moment (2.8%) and also hold I2, Amdocs and Parametric Technologies.'
Growth stocks in sector.
US economy has stabilised.
Long-term view positive.
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