Tech stocks cheapest in seven years as profit estimates drop

U.S. technology stocks, the second-best industry of the past decade, have fallen to the cheapest levels in at least seven years and are vulnerable to more losses as analysts reduce second-quarter profit estimates.

Earnings at computer companies will fall 5.5% in the three months through June as consumers and government agencies cut spending, according to more than 2,000 analyst estimates tracked by Bloomberg. The group, led by Apple Inc. and International Business Machines Corp., trades at 13 times projected profit, the lowest level compared with the Standard & Poor’s 500 since Bloomberg began compiling the data in 2006.

Bulls say the unprecedented discount means technology stocks, which tend to lead during expansions, are too cheap to pass up as the world economy grows. Bears say the shares will remain the worst-performing group in the S&P 500 this year with companies and governments spending less on technology as growth weakens in Europe and China. President Barack Obama’s proposed budget would reduce spending on information technology by $2.5 billion by 2015, according to Bloomberg Industries.

“I get the sense from a lot of managers that they’re going to sit on their budgets until the end of the year,” Peter Sorrentino, who helps manage about $14.7 billion including shares of Google Inc. and Intel Corp. at Huntington Asset Advisors in Cincinnati, said in an April 24 phone interview. He sold Accenture Plc and Apple shares last year.

‘Disappointing Numbers’

“It is looking as though the economy is going to flatline for a while, after the disappointing numbers from China,” Sorrentino said. “There isn’t a real catalyst here for ramping up production.”

The S&P 500 advanced 1.7% to 1,582.24 last week after better-than-projected earnings from Travelers Cos. and United Parcel Service Inc. outweighed data showing the U.S. economy grew 2.5% last quarter, less than forecast. Technology shares have underperformed the S&P 500 by 9 percentage points this year.

Of the 273 S&P 500 companies that have posted earnings this month, 74% exceeded analyst estimates, according to data compiled by Bloomberg. Rising corporate profits have helped lead the S&P 500 up 1.1% since the end of March, a shift from the past three years when the S&P 500 declined an average 15% after peaking in April. The index rose 0.2% to 1,586.01 at 9:48 a.m. New York time today.

Companies from Accenture to Juniper Networks Inc. and Motorola Solutions Inc. have predicted sales that trailed analyst estimates. The industry is 9.1% cheaper than the S&P 500, a bigger discount than seven of the nine other industries, behind only energy and financial stocks.

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