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Tech Stocks for 2008

Written By Brian Hicks

Posted November 1, 2007

What a difference a day makes. Just yesterday the broader markets rallied in the wake of the Fed’s latest quarter-point rate cut, and today the markets have turned heavily to the downside. Yesterday’s green has suddenly gone red.

An analyst downgrade of Citigroup Inc. (NYSE: C) and the whispers on the Street that yesterday’s cut by the Bernanke Fed has been its last have combined to punish equities today.

But while the markets continue to digest the events of the week, the tech stocks sector has been and will continue to outperform in 2008.

In fact, just yesterday one of technology’s biggest names, Google (NASDAQ:GOOG), sailed through the $700 mark, jumping nearly 34% since mid September. In that time, the Internet giant has added over $55 billion in market cap, passing one of the net’s old guard, Cisco Systems (NASDAQ: CSCO), in the process.

A 46% increase in third-quarter profits and the promise of even greater returns in the future have pushed the stock to all time highs, up 731% since its IPO in 2004.

The Google story, however, is just a part of the greater picture that continues to emerge in the technology stock sector. That’s because, to put it simply, the sector remains in serious uptrend, despite all of the bad news that continues to dog other parts of the market.

The QQQ’s Tech Stock Rally Is On for 2008

The rise in the popular PowerShares QQQ ETF (NASDAQ:QQQQ) is a perfect example of what’s going on in tech stocks. Take a look at the chart:


Since the sub-prime inspired pullback in March, the QQQ’s are up 28%, outpacing both the Dow and the S&P 500 by a long shot.

2 Reasons the Teh Stock Sector Is So Attractive in 2008:

The first is that with housing in the dumps and financials struggling to keep their bad news buried, the move towards tech stocks is completely logical. With their strong balance sheets and inroads into the global economy, techs–at this point–just make sense.

But beyond those obvious reasons there is also this: Technology stocks have always been somewhat disconnected from what’s going on in the broader markets. It’s just their nature.

Moore’s Law and the Tech Stock Cycle

Part of that stems from Moore’s law itself.

Because to a large extent real progress on the technological side is dependent upon the progress of the chips themselves. That tends to give technology stocks a rhythm of their own, since according to Moore’s law, hardware improves by a factor of one hundred every ten years, while software improves by a factor of ten.

That has helped to put the techs on something of a ten year cycle when it comes to making market-changing advances–the kind that pushes share prices higher.

The last of these game changers was the introduction of the Internet to the masses in 1996, as the technology to deliver it finally caught up with the marketplace. The bubble that followed in its wake, of course, was one for the ages.

Ten year later the tech clock has begun to tick again. Moore’s law has once again delivered. Today’s faster chips and improved software have led directly to the type of improved performance that has begun to usher in a new era in devices and on the net–one that might actually come close to living up to all of that hype that ruled the day in the late 90s.

That has enabled manufacturers to create and improve upon various devices, from PCs and laptops to cell phones, iPods and video games. Additionally, improvements in broadband and data compression have begun to foster a world where practically every bit of entertainment and information will be digital.

So while the first wave of the Internet ended up creating one of the biggest bubbles of all time, its second act just eleven years later is delivering where the first bubble failed.

In short, it’s putting up not just great earnings but the real prospect of future growth-and that’s what the markets are reacting to.

So while the Netscape IPO may have launched the first bubble, the Google IPO–in its own way–marked the beginning of technology’s latest act.

The difference, however, is that this time it’s for real. That’s why the sector still has room to run despite the current market troubles.

Besides, if you think that the Fed is finished cutting rates now–think again. Citigroup is the tip of the iceberg.

Wishing you happiness, health, and wealth,

Steve Christ, Editor