Very UndervaluedGains seen in the Nasdaq and SOX since the April lows point to a rotation into technology, which my models show as the cheapest sector, at 20.9% undervalued. The Nasdaq declined 5.4% in the first half of 2005, but since the April low of 1890, it's up 7.0%. I have been tracking the Philadelphia semiconductor index for a major, chart-related moving-average crossover, with the SOX off 3.3% in the first half -- but up 11.3% since its April low of 376.64. According to my models, as the second half of 2005 begins, all sectors are fundamentally cheaper than they were at the end of 2004. As the table below shows, basic industries, energy and transportation ended 2004 more than 20% overvalued. Of these, only energy remains overvalued, but only by 6.3%. The largest swing was in transports, which went from 28.4% overvalued to 5.1% undervalued. My model shows that technology continues to be where the value has been and should be for 2005. Technology begins the second half of 2005 at 20.9% undervalued, vs. 11.7% undervalued at the end of 2005. Among my technology indices of focus, computer manufacturers are 31.8% undervalued, semiconductors are 28.0% undervalued, and software is 22.5% undervalued. In sum, away from technology, most sectors are within 5% of their fair value, with health care 9.3% undervalued and energy 6.3% overvalued. This is a compelling case for focusing on technology in the second half of 2005.
|Focus on Tech in Second Half |
As the most undervalued sector, it demands the most attention
|Sectors||Valuation on Dec. 31, 2004||Valuation onJuly 1, 2005|
|Basic Industries||24.50% overvalued||3.73% undervalued|
|Capital Goods||17.65% overvalued||4.04% undervalued|
|Consumer Durables||12.41% overvalued||1.78% undervalued|
|Consumer Non-Durables||17.34% overvalued||2.46% overvalued|
|Consumer Services||11.88% overvalued||2.69% undervalued|
|Energy||22.15% overvalued||6.25% overvalued|
|Finance||14.44% overvalued||1.00% overvalued|
|Health Care||1.32% overvalued||9.32% undervalued|
|Public Utilities||9.02% overvalued||4.63% overvalued|
|Technology||11.67% undervalued||20.87% undervalued|
|Computer Manufacturers||31.79% undervalued|
|Software & EDP Services||22.48% undervalued|
|Transportation||28.44% overvalued||5.13% undervalued|
|Source: Global Market Consultants Ltd.|
Economy on Solid GroundLast week's better-than-expected readings for consumer sentiment and a higher-than-expected reading for ISM tell me that the economy should maintain a GDP growth rate of roughly 3.5% for the foreseeable future. The economy should not be hurt by a 4.25% neutral funds rate, which I predict will be declared by the end of the year, just in time for Fed Chairman Alan Greenspan to be congratulated at his retirement. Commodities prices appeared stalled last week, but crude oil remains a wild card. With a strong dollar and higher Treasury yields, there could be a rotation into the U.S. equity markets, with technology being the sector of choice.
Tech's Compelling GrowthIn tracking technology leadership, my first focus was the chipmakers, but now a major upgrade cycle is needed in the Internet protocol segment. This industry is estimated to have grown by 50% year over year. Retooling the Internet with an expansion of the use of broadband will drive IT spending in the second half of 2005. In June, the Semiconductor Industry Association reported that chipmakers were quickly working off excess inventory. The trade group predicts sales growth of 6% this year. Both Intel ( INTC) and Texas Instruments ( TXN) were among the semiconductor giants offering positive guidance for the second half of 2005; this backs up the SIA's prediction. Other growth segments include:
- WiMax, a version of WiFi, but with an expanded range of some 10 miles. Voice over Internet protocol (VoIP), which gives high-speed Internet providers a triple threat with television service, phone and broadband Internet access bundled into one package. Growth in the use of cell phones, with Nokia ( NOK), the industry leader in handsets, predicting a 15% growth rate for 2005 over 2004. A PC upgrade cycle, which will be driven by dual-processor components, which are necessary to handle the multitasking that the new Internet will provide.