TGIF Januray 20, 2012

At Bedell Frazier, we’ve always been big fans of technology. We use it all the time to boost our productivity and stay ahead of the curve. We launched our own website 15 years ago, long before our peers.  We have an all-MAC office now.  Last year, we moved many of our systems to the Cloud but enough about us. Suffice to say: We love tech.

When the tech bubble burst 12 years ago, we affirmed our discipline: Don’t pay too much for growth, especially in the IT sector. The problem with most Information Technology industries is that there are far fewer barriers to entry and less protection from failure than anywhere else in our economy. Rapidly growing tech industries and companies attract lots of financial and human capital that can quickly destroy “yesterday’s” technological innovations and rapidly erode profit margins. No other industry is as prone to commoditization as is technology. Tech companies come and go rapidly.

Since 2009, tech stocks have been selling at about the same multiple of earnings as the overall market. The Price-to-Earnings Multiple is known as P/E Ratio.  You may recall the P/E for tech stocks peaked at a record 48 during March 2000.   Some companies didn’t even have earnings.  We called it the bubble.  Fast forward to today when we enjoy CHEAP tech stock multiples around 13 times earnings. This is the same P/E as the overall market, making today’s prices the cheapest they have been relative to the market since December 1995. Tech is a highly competitive sector with a higher profit margin and faster growing earnings than many other sectors. To repeat, we still love tech!

This week, GOOGLE missed earnings expectations but IBM beat estimates. GOOG is barely a teenager founded a dozen years ago, while IBM, founded in 1910, is over the century mark. BOTH companies have a market cap of roughly $200 Billion. Sure GOOG stock got a little ahead of itself, but has the momentum and is still trading at 13 times this year’s earnings. But those earnings should grow 20%.  Worried? Nope.  We are not worried about GOOG or IBM.  They’re both re-inventing themselves daily.

We are enjoying a stellar start to 2012 for the Bulls, the best start since 1987.  But that darn 10-Year Treasury Yield hovers around 2% which suggests we aren’t out of the woods yet.  The Bond Market is almost always smarter than stocks.  It keeps us on guard, but we are positively benefitting from this rally.

BTW: When the 49ers face the NY Giants on Sunday, we’ll be yelling GO NINERS.  Please join us!

By: Mike Frazier

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