Skip to main content

Software a defensive sector? Who knew?

I often write about tech stocks on this blog. Today I read an interview with one of the most well-known managers of a technology mutual fund.

The Wall Street Journal had a conversation with Paul Wick, manager of the Seligman Communications and Information fund (SLMCX). With 20 years as manager of this fund, he has consistently ranked in or near the top 10% among his peers.

Mr. Wick makes several points that will be familiar to fans of tech stocks. He comments that many tech stocks have "grown up" (my phrase), have solid business models and have reacted to the downturn by cutting costs and finding other ways to remain profitable. He contends that the tide is turning for many tech sectors and, therefore, the run-up in many tech stocks is justified. Even some of the lower quality companies have reasons to bounce.

These are ideas that are not unusual though they are open to dispute among those who feel less bullish on the economy in general or tech stocks in particular.

Prompted by the WSJ, Mr Wick described why software is his favorite sector and the best business in technology:
  • Stickiest, with the highest switching costs for customers
  • Best pricing power in the tech sector
  • Many companies in the sector that are not especially correlated with each other as they operate in significantly different areas of the tech sector
  • It is a consolidating industry
  • Many companies have a great deal of cash on their balance sheets
As he went through this list, it occurred to me that he was describing a defensive sector, one that is resilient and has a growth component but still has many of the characteristics of a defensive investment including cash on hand, pricing power, a wide moat (stickiness) and non-correlation. All of these factors tend to reduce risk.

Another aspect of a defensive sector is that it will grow but not as fast as more "rocket-stock" oriented sectors. For example, the semiconductor and networking sectors have outperformed the software sector this year. We compare them in the chart below with the sectors represented by the iShares Software ETF (IGV), the Semiconductor ETF (IGW) and the Networking and Media ETF (IGN).

At the worst points in the downturn, software managed to do a bit better than the other two sectors though they sometimes traded places. At no time, however, was software the worst performing sector. Subsequently, software delivered the kind of growth tech investors generally expect in return for the kind of volatility and risk tech often exhibits.

The lesson here is that if you are building a tech portfolio, it is important to include the software sector either in the form of an ETF like IGV or via a carefully researched selection of software stocks. It can help smooth out the overall performance and provide some confidence when the economic environment gets shaky.

Disclosure: long IGN and USD

Comments

Anonymous said…
Dear,
I want to make 1 guest post in your site, if you permit me. The post contains 350 words above and it is totally unique as it is written by my content writers.

Please contact me at ericasmith568(at)gmail.com soon. Moreover, I will place your link in one of my finance sites.

regards,
Erica Smith

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:


Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:


Results here were actually quite good and, to make things even better, the previous month was revised upward.

N…