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Could Tech Be A Contrarian Indicator?

Over the course of the past three weeks, 79% of the information technology sector has reported its second quarter earnings results. Overall the season has been mixed, with many beating estimates, but providing weak guidance which sent a number of high profile stocks lower.

Nine of the top 10 tech stocks in the S&P 500 information technology sector index, representing $2.5B in market cap and 64% of the tech index, have reported second quarter results. Only two missed Street projections, yet all but four of the nine traded down the day after results were released. The beat rate for the overall sector is 72%.

Why, then, such a negative reaction to positive results? One thing to consider is the sharp decline in consensus expectations from the start of the year into the reporting period. That likely made investors believe it was conceivable that the tech sector could actually end up easily exceeding the dramatically diminished Q2 expectations (reduced by more than any other group except energy and materials).

On top of that, early results from Netflix and Google helped to set the tone for not only large beats, but impressive guidance expectations. After all, the sector moved notably higher on these results (the S&P 500 tech index was up more than 5% the week they reported).

Analyzing nine of the top ten tech sector holdings, i.e. the most influential stocks in the tech index, you can see in the table below that most of them currently are trading at a discount to their historical 10-year average forward P/E multiple. Part of this can be attributed to slowing growth for some companies and some end markets as well as the impact of the strong dollar, but more so it likely reflects how out of favor the group has become to investors.

Ultimately this could be a contrarian indicator for a buying opportunity. If nothing else, most of these companies are not expensive, their stocks are still outperforming in a weak market and three of nine of them are offing dividend yields that are better than the 2.1% the S&P 500 provides.

Stock Performance and Valuation of 9 of the 10 Largest Tech Stocks in the S&P 500

Stock Performance and Valuation of 9 of the 10 Largest Tech Stocks in the S&P 500

Source: S&P Capital IQ. Note: Year-to-date stock performance as of 8/5/15

Please see our report titled “Technology As A Contrarian Indicator,” published August 6, for a more detailed analysis of the top tech sector stocks, including stock reaction and guidance detail, and sector valuation.

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