Winter May Mean Spring for Tech

11/10/2008 1:00 pm EST

Focus: MARKETS

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Dan Wiener, editor of The Independent Adviser for Vanguard Investors, says this may be a good time of the year to buy technology stocks.

With everything down big so far this year, it’s crazy to try to focus on just one industry that might make a rebound in the coming months. But history has shown that we are entering the traditionally strong period for technology stocks—a period I call “Tech Winter.”

Tech Winter refers to the four-month period between the end of October and the end of February, when tech stocks tend to outperform the overall stock market. Why this historical tech heat wave in the coolest of months?

Information technology managers tend to hold back some of the money in their budgets during the course of the year in case of a late emergency or [unexpected purchase]. However, as the calendar draws closer to year-end, this unspent money needs to be used. Why? Because the tech managers know that next year, if they have something left over, they’re likely to see a reduction in their budgets, and they don’t want that.

So, they spend freely in the year’s final months. And the tech stocks that are expected to benefit from this seasonal year-end spending begin rising on expectations of increased earnings in the coming year. Even with the global economy slowing, there is always a need for upgraded or replacement technology.

[Also,] European purchasers account for a significant percentage of US technology orders, and during the fourth quarter, they do a lot of buying. This happens year after year because of the longer summer vacations European companies give their workers, during which time orders slack off. When workers return, orders begin rising in the fall and through the winter, often hitting a peak in the last few months of the year.

[Finally,] hardware companies, beginning to retool for new product launches, start offering discounts on existing inventory to speed sales. These discounts allow corporate purchasers looking for proven technology to buy the cheap, well-tested products still sitting on manufacturers’ shelves. The net effect is that technology companies begin to see increased demand, and tech stocks rally in advance of earnings news.

Tech Winter draws to a close after the start of the new year, when technology companies restock their inventories and a new purchasing cycle commences. As this happens, tech stocks don’t necessarily underperform the stock market as a whole, but they do become less predictable in their movement, not following the pattern commonly seen between November and February.

There are definitely periods when Tech Winter freezes up completely. And last year’s Tech Winter was a bust. The MSCI Information Technology index has only had about a 50% record of beating the Standard & Poor’s 500 index over the four-month Tech Winter period. So, it’s not a sure thing.

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