Tech is Cheap

11/22/2013 9:00 am EST

Focus: STOCKS

Stephen Leeb

Founder and Research Chairman, Leeb Group

The technology sector is cheap, trading at only about, roughly 13 times forward estimates. This is a significant discount to the sector's 15-year forward and 20-year trailing averages of 23 and 26, respectively, observes Stephen Leeb in The Cash Cow.

Meanwhile, the fundamental picture for the technology sector looks very promising. The improving economic picture is likely to accelerate capital spending in this sector, something that has been sorely needed since the crisis.

Corporate investment in technology, as a percentage of GDP, has fallen to a nearly 15-year low, and the average age of tech equipment at companies is particularly high. As the economy improves and corporate leaders conclusively exhale, this will undoubtedly change.

Meanwhile, the industry is lean, margins are strong, pricing pressure has largely abated, and tech companies are financially sound, precisely when a new capital spending upcycle is about to begin.

The fourth quarter has historically been good for tech stocks and equities in general. The S&P 500 (SPX) has averaged a 4.26% gain since 1980, with all ten sectors also averaging positive returns over that same time span.

Technology is one of only two sectors to average a gain of more than 5% during the fourth calendar quarter (the other is Consumer Staples). And it is fairly consistent, booking a positive fourth-quarter return, roughly 70% of the time, since 1980.

Valuation, fundamentals, and timing look good for tech stocks. We currently have two recommendations in this sector.

The PowerShares S&P 500 Small-Cap Technology (PSCT) is geared towards smaller, more agile, but also less-established firms, while iShares S&P North American Technology ETF (IGM) offers broad, blue-chip technology industry exposure.

Both are up well, so far this year, 15% and 27.5% respectively, and stack up well against the 12% return booked by the S&P 500 Technology sector as a whole. PSCT is for the more speculative among you, while IGM is more conservative. Both are buys.

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