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Tech stocks score big gains to lead the market in '09

December 23, 2009 |  5:30 am

In Wall Street’s horse race among stock sectors this year it won’t be a photo finish: Big-name technology shares are way out front and still gaining ground.

Among the 10 major industry sectors in the Standard & Poor’s 500 index, tech stocks have rallied 58% in 2009, on average, led by well-known names including Google (up 95%), Microsoft (58%) and IBM (54%).

The S&P tech sector’s advance far outpaces the index’s second-best sector, basic-materials stocks, which are up nearly 44% year-to-date, on average.

In third, fourth and fifth places, respectively: consumer discretionary stocks (home builders, retailers and restaurants, for example), up 40%; industrial issues, up 18%; and health-care stocks, also up about 18%.

Googlesign The S&P 500 index overall has gained 24% for the year.

Of course, tech’s performance in 2009 is partly a function of how far it fell in 2008, when the average tech issue in the S&P lost nearly 44%, worse than the 38.5% loss for the index overall.

But at a point where Wall Street is relatively confident about the economic recovery continuing in 2010, tech continues to have widespread appeal among big money managers.

Tacoma, Wash.-based Russell Investments, which quarterly surveys portfolio managers nationwide, said its fourth-quarter poll found that 82% of managers were bullish on tech stocks’ prospects in the near term. That was the highest bullish percentage for any of the 10 S&P industry sectors.

Could the majority be wrong? That's often the way it turns out. A year ago, amid the market's meltdown, the Russell survey of fourth-quarter 2008 pegged health-care stocks as managers' favorites -- understandable, given the sector's "defensive" nature.

Even so, tech was a close second in that survey, with 62% of managers bullish about the industry compared with 66% for health-care. If they followed their own advice and bought tech shares those managers are sitting on hefty gains now.

In the latest survey, Russell attributes tech stocks' allure to three main factors: solid growth prospects, strong balance sheets (many big tech firms have little debt) and, at least until recently, the weaker dollar, which can boost foreign earnings when they're brought home.

Tom O'Halloran, a portfolio manager at Lord Abbett & Co., put it this way in the Russell survey: "I expect that technology will lead the market due to ongoing innovation, lean operating models, very strong financial structures, and a decade of neglect."

As for valuations, tech issues, like most stocks, aren't the screaming buys they were a year ago, hindsight being 20-20. At this point, investors will have to decide whether they're comfortable paying 23 times estimated 2010 earnings per share for Google, 21 times for software firm Adobe Systems or 12 times for IBM, to name three examples -- or whether they'd rather wait to see if 2010 brings a chance to buy at cheaper prices.

-- Tom Petruno

Photo credit: Daniel Deme / EPA