Technology Sector in Turmoil

There was some good news from a large-cap computer company. Hewlett-Packard received a favorable tax ruling that boosted its net earnings.

Compared to IBM, HPQ has done exceedingly well recently. If you look at a long-term chart of HPQ, you will notice that the stock now seems to have reverted to its historical rates of return.

The stock broke out of its traditional pattern between 1995 and 2000, retreated significantly along with most other technology companies between 2000 and 2003, and is now doing well once again. My hat goes off to HPQ. For a large-cap IT company, you have to give the company credit for its recent performance.

IBM on the other hand seems to be stuck in a rut. The stock dropped from $120 per share to $60 in 2002, and hasn’t done much since. The stock’s been trading around $80 per share for the last three years and the company continues to lay off people.

IBM’s operational and stock market performance serves to illustrate that all things go through cycles of expansion and contraction. It is my contention that most of the large-cap companies in the stock market are slowly returning to their historical rates of return. With this in mind, IBM may experience some downside, or at the very least, continue to trade in a range around its current level while the rest of the market advances.

Another company that’s holding back the Dow Jones Industrial Average is Intel Corp. Not only did the stock get hammered in the big technology correction after 2000, but it’s been dropping steadily since January 2004. This stock looks well on its way to $15 per share, which may represent a new price floor for a while.

So, the point of all this large-cap analysis is that the technology sector is still very much in turmoil and that you have to be very careful considering investments in this area.

Telecommunications/technology companies look more attractive right now. Without question, I think there is a greater probability of out-performance by considering more nimble mid-cap companies in the broader technology sector.