You wouldn't know it from the Nasdaq's performance this week or guidance from Cisco ( CSCO), but the nuclear winter in tech spending is over. "Despite the short-term negatives, we see recent market activity as a pause in an otherwise decisively positive secular reversal," commented Gary Liberman, who manages the $180 million J.P. Morgan U.S. Technology fund, an offshore offering of J.P. Morgan Fleming. "While our meetings with chief technology officers have revealed that a return to the build-out mentality is still a few quarters away, the period of indiscriminate deferments seems to have passed." Liberman therefore finds the software sector and enterprise networking stocks attractive, and believes the trend toward wireless LANs favors semiconductor companies with exposure to this area. "Wireless LAN is not a hot area we're chasing but one of the pockets of relative strength," he stressed. Because of compliance issues, he was loath to give specific recommendations but said Broadcom ( BRCM) and Intersil ( ISIL) are two names the fund is long that he believes will benefit from the trends. With a name such as Broadcom, valuation is of course an issue. The company isn't expected to turn profitable until the fourth quarter and is projected to lose 16 cents a share for the year, according to Thomson Financial/First Call. Heading into today, the shares were trading at 34.2 times projected revenue per share. Still, Broadcom's revenues are expected to grow 11.6% this year and by 35.2% in 2003. Liberman conceded that fund managers "haven't been disciplined" when it comes to Broadcom, among others, but argued that analysts and company executives as a whole are being extremely cautious with projections now.
"At this point, high valuations in semi names represent the fact analysts have numbers that are lower than the normalized earnings power these companies have," he said. "If you take a longer view -- two years -- you could see much bigger than expected earnings per share as markets come back and new markets take off." Including discussions with CTOs and recent presentations by company executives, Liberman admitted that much of the evidence of the end of the tech spending slowdown is anecdotal. But the duration of the slowdown and the shrinking of inventories "also tells you a shift in end demand" is coming, he argued. In a report this week, Goldman Sachs economist Ed McKelvey reached a similar conclusion from a more empirical vantage point. "Fresh data in recent days support our view that business outlays for technology are bottoming out," he wrote. In the advance fourth-quarter GDP report last week, there was "only" a 5.5% annualized decline in outlays for computers and peripherals, software, and communications equipment vs. a 22.5% drop in the first three quarters of the year, he noted. Most of the slowdown last quarter was due to a 21.8% annualized decline in capital spending on communications equipment vs. a 3.7% drop in software and a 10.1% rise in spending on computer hardware, McKelvey noted. That echoed Liberman's observation that the optimism does not extend to the telecom carrier sector, which has "gone another notch down in terms of guidance, sentiment and fundamentals," highlighted by Global Crossing's ( GBLX) bankruptcy filing and WorldCom's ( WCOM) various (and sundry) struggles. The 3.1% rise in net new bookings for computers and electronics in the December factory orders report -- the fourth increase in five months -- also supports the tech-spending recovery scenario, the economist wrote. "Although not every piece fits neatly into the puzzle, the mosaic is one of a sector turning from deep decline to modest growth," McKelvey concluded, reiterating a projection for 5% to 10% annualized growth in corporate spending on information and communications technology this year. Of course, some cracks in the tech spending permafrost are a far cry from the blistering hot days of 1999. None of this should be taken as a signal to "load up the boat" again with tech stocks, and the Comp was struggling again at midday today.