Warning: Tech Meltdown Imminent

A recent analyst report from a major investment house suggests that if you're invested in tech in 2008, you are about to be finished. We're talking post-Y2K hangover, dot-com implosion, "multiyear descent" finished.

Hogwash.

If you own or are buying the right tech stocks in 2008, you'll be doing too darn well to even notice how the rest of the industry is doing.

But your title ... it says different
That major investment house has its theories. Yet so do Standard & Poor's, Bill Gates, and others who expect quite a strong performance from tech in 2008. Who's right? Well, here's the short-short version of the argument:

  • In 2007, financial companies accounted for 25% of all IT spending.
  • The financial sector is not doing so hot right now.
  • Current projections of IT spending in 2008 may be overly generous.
  • The tech sector is a lagging indicator of the health of the U.S. economy.

That's all reasonable. Financials are in the dirt right now, and the fact that the U.S. economy may be stalling definitely doesn't bode well for tech companies. But examine the report's grand finale:

  • The relative performance of the tech sector vs. the financial sector in 1999 looks vaguely similar to the sectors' performances in 2007. Ergo, in 2008, the performance of the two could resemble what happened in 2000.

Balderdash
Is that a joke? We are led to believe that because tech outperformed the market in 1999 while financials lagged -- and then the two groups flip-flopped in 2000 -- that 2007 and 2008 will demonstrate a similar pattern?

These analysts would have me believe that a dud such as Washington Mutual (NYSE: WM  ) would outperform a great prospect such as NetGear (Nasdaq: NTGR  ) simply based on a totally misused historical comparison? Nonsense. WaMu might beat out Netgear in 2008 by sheer coincidence, but which would you rather have in your portfolio?

Personally, I'm inclined to buy the company that has grown free cash flow at a 21% annualized rate since 2004, increased sales at a 24% clip during the same period, and has nearly $180 million in cash and no debt or subprime mortgage exposure.

A vastly different industry
Investing today is strikingly different than it was back at the turn of the millennium. Rather than sitting on the precipice of a massive tech bubble (fueled by speculative, risk-ignorant investors) we're immersed in a global financial credit crunch (fueled by speculative, risk-ignorant investors). Well, perhaps it's not so different after all.

But it is different. The technology sector is far more robust, well-developed, and economically savvy than it was even eight years ago. As an example, take a gander at three of the Nasdaq 100's biggest tech companies then and today:

Then:

Market Cap (billions)

Price-to-Earnings Ratio

Enterprise Value-to-Revenue Ratio

Net Margin

Amazon.com (Nasdaq: AMZN  )

$22.6

N/A

10.5

Negative

Oracle (Nasdaq: ORCL  )

$158.1

95.5

20.1

14.6%

Dell (Nasdaq: DELL  )

$123.2

62.9

3.9

6.6%

Today:

Market Cap (billions)

Price-to-Earnings Ratio

Enterprise Value-to-Revenue Ratio

Net Margin

Amazon

$31.9

87.5

2.3

2.8%

Oracle

$104.1

22.2

5.1

23.8%

Dell

$45.6

15.4

0.6

5.0%

Source: Capital IQ.

Right off the bat, these same companies look far more intriguing today -- based on relative valuation -- than they did eight years ago. And I'd venture to say much of the tech sector has gone through a similar catharsis and still has excellent forward growth potential.

The tables above are definitely not a scientific example, but they serve to illustrate a larger point: The tech sector as a whole is far healthier, is operating stronger, and is far more reasonably valued then it was eight years ago. The year leading up to the burst of the dot-coms is simply not a relevant period of history when determining the future for the sector in 2008.

Buy smart tech
Instead of selling your tech stocks and chasing after financials, go after the best technology companies in 2008. After all, I have no place suggesting that financials won't beat technology this year -- only that you can do better than either with just a few select stocks.

That's because growth opportunities found in tech today are just as massive as they were years ago. Thanks to much smarter business models than in 2000, there's no shortage of opportunities. For your consideration, I'll even offer two of my favorite tech-ish picks for this year: Orbital Sciences (NYSE: ORB  )  and Secure Computing (Nasdaq: SCUR  ) . 

Orbital Sciences is the premier American name in the development of rockets and space systems. On top of a very reasonable valuation, this company is well positioned as an integral player in satellite delivery, missile defense, and other long-term space initiatives. Secure Computing is a cash-flow monster that operates as a top-notch player in Web security -- a field that should see significant growth in 2008 and beyond.

More where that came from
Not unintentionally, Orbital Sciences and Secure Computing are two very attractive recommendations of our Motley Fool Rule Breakers growth investing service, where we're focused on delivering the best tech opportunities today to our subscribers.

I added Secure to my personal holdings in 2007, and I would encourage you to examine exactly why I bought by accessing all of our research with a 30-day free trial to Rule Breakers. There is no obligation to subscribe.

Nick Kapur is a Rule Breakers analyst and owns shares of Secure Computing. Netgear, Amazon.com, and Dell are Stock Advisor recommendations. Dell is also an Inside Value selection. Washington Mutual is an Income Investor pick. The Motley Fool has a disclosure policy.


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