Tech stocks have the buzz – but think spending, health care

With all the buzz over Twitter’s imminent initial public offering and the headlines about the newly-introduced iPad from Apple Inc., financial advisers could be forgiven for getting excited over investing in the technology sector.
But Alex Gurvich, founder and co-manager of The Rockledge Group, warns advisers to not get too carried away, even though there are some examples of solid performance in the group.
“Sure, you might get a pop [in certain tech stocks] when the new iPad comes out, but there is a fundamental lack of IT growth,” he said.
Mr. Gurvich, who uses fundamental stock research to invest across broad market sectors, said the market is misreading the technology sector and possibly overlooking other opportunities in areas such as health care and consumer discretionary.
His strategy, which relies on sector exposure to capture alpha, begins with basic analysis of the individual stocks represented in a sector.
Apple Inc. (AAPL), for example, came into 2013 on a four-year run that saw the stock gain 147% in 2009, 53% in 2010, 26% in 2011, and 33% last year.
However, through the first 10 months of 2013, the stock is down less than 1%.
“My perspective is that there have been no real increases in IT spending, and companies have been very slow to adapt new software and buy new computers,” he said. “And there are no major reasons to upgrade either, because there have been no major technological upgrades.”
The technology category, as measured by the Technology Select Sector SPDR ETF (XLK), is up 18.3% so far this year.
“Stocks typically perform based on fundamental factors,” Mr. Gurvich said. “But all stocks in the same industry group will tend to move the same way because of the issues affecting the sector.”
He cites Amazon.com Inc. (AMZN) as an example of where investors can get tripped up and miss some valuable sector performance.
Amazon, which is often associated with the technology sector, has seen its stock price gain more than 45% since the start of the year.
Mr. Gurvich believes the company actually is more of a consumer discretionary stock, which is a sector he likes even in a sluggish economy.
“Overall, I think the economy is improving very slowly, but it is catching up to the stock market,” he said. “There is more employment, even though it’s a lot of part-time jobs, but that’s better than no job and it means consumers will be spending.”
With that in mind, Mr. Gurvich likes the consumer discretionary sector, which has gained 35% this year, as measured by the Consumer Discretionary Select Sector SPDR ETF (XLY).
Health care is another of the themes he is playing in his sector-rotation strategy.
“With health care you’ve got two major themes; you’ve got the aging population and you’ve got increased spending on health care with health care reform,” he said. “The Obamacare law is here and it will cause increased spending on health care, which is the exact opposite of the original intentions of reform but it will mean increased revenue for the health care sector.”
The Healthcare Select Sector SPDR ETF (XLV) is up 34% so far this year. The S&P 500, over the same period, gained 25.3%.