Key Takeaways

  • Cash-rich, mature tech companies may take actions to unlock shareholder value
  • The sector seems poised to withstand rising rates and may potentially benefit from growing capital expenditures (capex)
  • Funds such as the iShares U.S. Technology ETF (IYW) provide exposure to information technology stocks

Yesterday's tech for today

The S&P 500 has more than tripled in value since 2009, leading many to declare that U.S. stocks are fully valued. However, opportunity may still exist in at least one sector – technology. While global growth worries threaten to end the bull market cycle, tech stocks, particularly those of mature tech companies, may offer upside potential in the near-term for the following reasons:

1. Well positioned for upcoming rate and capex cycles

With the U.S. economy continuing to show signs of improvement, the Fed is expected to raise rates in the near-term.

  • Increasing borrowing costs should have less of an effect on tech as it is the only sector with positive net cash (Figure 1).
  • Tech has historically performed well during periods of rising rates, particularly compared to sectors with more debt.1
  • As a pro-cyclical growth sector, tech can potentially benefit from continued economic improvement and an expected increase in capital spending by U.S. companies across the board.

Figure 1: Net debt per share for S&P 500 sectors

chart: Net debt per share for S&P 500 sectors

Source: Bloomberg, as of 11/16/15.

2. Strong balance sheets

Thanks to their enviable financial health, certain tech companies may likely deliver shareholder returns over the coming year through share repurchases, dividend increases and M&A activity.

  • High-quality, mature tech companies may be more inclined to take these actions and, in some cases, are being pushed to do so by activist investors.
  • The tech sector claims 40% of total corporate cash reserves in the U.S., and is responsible for 56% of the increase in total corporate cash over the last five years.2
  • Tech spending on buybacks and dividends (as a percentage of free cash flow) is 22% above historical levels.3

3. Reasonably valued with upside potential

Tech stock valuations look reasonable compared to other U.S. sectors and there may be additional room to run.

  • Tech sector earnings have grown in each of the past five years, with earnings expected to continue expanding in 2016 and 2017.4
  • Tech companies currently trade in line with the S&P 500, and well below their trailing 10-year average of 9% P/E premium.5

Funds such as the iShares U.S. Technology ETF (IYW) offer exposure to large, mature tech companies.

IYW

iShares U.S. Technology ETF

1. Factset, Haver, and Goldman Sachs Global Investment Research.
2. Forbes, as of 5/8/15.
3. Goldman Sachs Global Investment Research, as of 9/30/15.
4. Bloomberg, as of 10/16/15. Compilation of sell-side earnings estimates.
5. Bloomberg, as of 11/16/15.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares ETF and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.

Technology companies may be subject to severe competition and product obsolescence.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

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