In slow-growth time, tech stocks hot again

NEW YORK – Technology stocks are trending big-time as investors latch on to innovative companies racing ahead in a slow-growth world.

The tech-heavy Nasdaq is the best performing major U.S. stock index this year, gaining 6.6 percent as the Standard & Poor’s 500 and the Dow Jones industrial averages have wavered between small gains and losses.

The industry has re-established itself as the dominant sector in the U.S. stock market and currently accounts for 20 percent of the value of the S&P 500 index. That is tech’s largest share since the dot-com bubble, and makes it the biggest sector in the market.

But the sector’s success isn’t universal. Some of the most recent earnings reports from big tech companies have highlighted both the good and the bad for the industry.

Here are three positive trends for tech, and two negative ones.

Room to grow

The economy is still expanding, but at a tepid pace.

Tech companies, however, are generating rapidly rising sales and profits as they disrupt older industries. And that is drawing in investors.

Facebook’s revenue jumped 39 percent in the second quarter. That compares with a 4 percent fall for S&P 500 companies in the period.

Surprisingly affordable

Despite its run-up, the sector is not that pricey. In fact, tech stocks are trading at a slight discount to the market.

The average price-earnings ratio, a measure of how much investors are willing to pay for each dollar of earnings, is 16.2 for tech companies in the S&P 500. That is below the 16.5 ratio for the entire index.

Dividends

During the last Internet boom, tech companies developed reputations for being extravagant spenders. The money was spent chasing growth, not pleasing shareholders.

Nowadays, many of the larger, more established tech companies are returning cash to shareholders in the form of dividend payments.

Two-thirds of technology firms in the S&P 500 pay a dividend, according to S&P Dow Jones Indices, accounting for 15 percent of all dividend payments made by companies in the index. Some of the biggest names in the sector even pay better-than-average dividends.

Watch out for froth

Investors may be getting carried away with the prospects for some stocks. Netflix is an example.

The company has been on an incredible run. Since bottoming out at a split-adjusted $7.54 in August 2012, the stock has soared 16-fold to peak at $126.45 on Aug. 6.

Netflix has added 38 million subscribers around the world during the past three years while expanding into dozens of countries.

But investors are paying a high price for that growth. The P/E on the stock has jumped to 427 this year.

Overseas exposure

Of all the S&P 500 sectors, tech is the most exposed of all the S&P 500 sectors to demand from overseas.

About 60 percent of the sector’s revenue comes from abroad, according S&P Dow Jones Indices.

As a result, earnings in the group will be hit if the dollar continues to strengthen, as it has done over the past two years. That’s because a stronger dollar reduces the value of overseas sales and makes U.S.-produced goods more expensive for foreign buyers.