Tech stocks hit new high

Growth in computer hardware and software sales is tepid, technology executives are hesitant to predict a recovery, and layoffs and a weak dollar are about the only real drivers of profit growth.

In other words, it's been a very good time to be a technology investor.

From the doldrums of February to the peaks of July, shares of technology stocks rose roughly 40 per cent and in some cases doubled, despite little evidence of a long hoped-for recovery in technology sales.

Through the end of July, the Nasdaq 100, something of a barometer for technology stocks, outperformed the broader Standard & Poor's 500 index by 12 per cent, according to Thomson First Call.

A few weeks ago, the momentum disappeared and stocks have been holding for about a month at slightly lower levels.

Hope, it seems, can only drive technology stocks up so far, and investors are demanding strong revenue growth before turning more bullish on technology issues.

"It wasn't a secret that there wasn't a ton of fundamental change," said Marty Shagrin, who analyses technology stocks for Victory Capital Management, which has $63bn in assets under management. "Valuations got rich, and you had a lot of stocks up 30, 40, 50 per cent."

Semiconductor stocks, among the hardest hit of any in the technology sector, have returned to one-year highs, even as executives have stuck to only cautious projections of a recovery in a three-year business slump.

Computer hardware companies saw their stocks rise by nearly half. While computer sales did rise in the second quarter, the top personal computer seller, Dell, waved off proclamations of a return to 1990s style growth.

"I will certainly tell you that there is increased optimism among chief executives and large companies, but I don't really want to characterise it too strongly," Michael Dell, the co-founder and chief of the company, said on a conference call after Dell's earnings report on Thursday. "It's sort of incrementally improving."

There was nothing incremental about the gains in Dell's stock price and shares of other technology players, such as Yahoo!, which runs the Yahoo.com website. Dell's shares reached as low as $22.59 in February, and peaked 50 per cent higher at the end of July. Yahoo! stock nearly doubled between February and mid-July, before retreating slightly.

Some investors say technology, like the broader market, was due for a recovery after pessimism about a weak economy became excessive. Some good macroeconomic signs have emerged: industrial production in July topped expectations and a bump-up in consumer prices helped ease fear of deflation.

The fluctuation in technology share prices tends to exaggerate the market as a whole, so when optimism returns, the gains in technology stocks becomes very apparent.

"The rally really marked the end of the selling panic," said Jeff Matthews, who runs Ram Partners, an $80m hedge fund in Greenwich, Connecticut. "We had a selling panic that kind of peaked in February or March, and technology stocks being high beta stocks, moving in exaggerated fashion to the market, were down the most and they rebounded the most."

Matthews said he believed higher interest rates have taken the air out of technology stocks recently, as investors pulled cash out of equities. But the fire could return soon, he said.

"We are seeing signs of life, fundamentally, for the first time in three years," he said.