Understanding the Two Keys to Tech Company Stocks in 2013

Tech stocks are popular purchases for 2013 equities portfolios, having been singled out by numerous strategists as a sector set for the bigger gains. But for tech investors to do well this year, a couple of key assumptions must pan out. The comments that major tech companies offer with earnings reports in the next few weeks will give us clues about whether they will.

Assumption #1: Corporate America will open its vaults in 2013

U.S. corporations are sitting on some $1.2 trillion in cash now, having drastically slowed capital expenditures during the uncertainty surrounding most of 2012. Such hoarding particularly hurts tech companies that sell big-ticket items to businesses. That behavior kept a lid on shares of a lot of solid tech companies in 2012, like Automatic Data Processing (ADP), International Business Machines (IBM), Cisco (CSCO) and Juniper Networks (JNPR).

ADP Chart

ADP data by YCharts

Bullishness on this front focuses most on the services (as opposed to hardware), where spending is already ramping higher. PC-chip leader Intel (INTC), for example, saw its share price plunge last year because the chip business didn’t do so well, but its cloud services division is booming. Higher capital expenditures would help all sorts of tech, and several companies, including software maker Oracle (ORCL), wi-fi equipment maker Aruba Networks (ARUN) and tech consulting firm Accenture (ACN), have indicated that they see businesses as ready to spend significantly more on tech this year.

Assumption #2: China’s economy is on the mend

Tech is a particularly international business, and China’s econony over the last couple of years hurt. IBM makes chips for massive mainframe computers for big banks and other corporations that not only cost big bucks (see point one), but also rely on lots of overseas sales. China Mobile (CHL), for example, is a big IBM client for numerous products and services.

China also will play a key role in the fortunes of Apple (AAPL) this year. The iPhone faces stiff competition there from lower-cost devices, and Apple is rumored to be developing a cheaper version of it for the Chinese market. The success of such a launch – and how well Apple’s profit margins hold up in the process – will depend in large part on how rich consumers there are feeling.

In fact, bullishness for several mobile phone related companies comes largely from expectations that Chinese consumers will spend more this year. Teradyne (TER), a $3.2 billion market cap company, has become a popular pick among analysts. It makes test equipment for semiconductor companies in the mobile arena, such as Qualcomm (QCOM) and Samsung. Also carrying lots of buy recommendations on China growth is Agilent Technologies (A), which makes high tech measuring equipment for medical, semiconductor and several other industries. Investors in neither company had a stellar 2012.

TER Chart

TER data by YCharts

Of course, having either of those assumptions proven out would benefit a broad swath of the market. Listening to the tech companies in the coming days is a good way to get some hints about how well that’s going.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.



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