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Are Technology Stocks Gearing Up for Another Bubble?

Zero Hedge

The next time we get a serious dip in the stock market, there is one sector that I am going to jump into with both of my size 14 boots: technology stocks. 

After the dotcom bust of 2000, these bad boys spent nearly a decade in the penalty box, shunned by the investing world as the poster boys for wild excess. Think Robert Downey, Jr. on steroids. During this time, cash balances doubled, free cash flows soared, outstanding shares shrank, and multiples fell to a tenth of their bubblicious peaks.

 I started recommending this group at the absolute bottom of the market last March (click here for the call at http://www.madhedgefundtrader.com/March_2__2009.html ), and it was no surprise to me when they outperformed almost every sector on the upside. With 60%-80% of their earnings coming from abroad, primarily Asia, I saw them really as foreign stocks wearing cowboy hats, pearl snap buttoned shirts, and Ray Ban aviator sunglasses.

They were great weak dollar plays. They did not need banks, as they are almost entirely self financed. They avoided many of the management errors that torpedoed so many other US firms, like derivatives books  and leveraged real estate exposure. While their American customers were getting poorer, hundreds of millions more overseas were getting richer.

The industry represents the last, best hope that America has for competing globally, as it is our only means of staying on top of the international value added chain. It seems that in addition to bulk commodities like corn, wheat, soybeans, coal and timber, aircraft, weapons, and movies, tech companies are among the few that make things foreigners want to buy.

The lessons of the bubble made them ultra conservative in their capital spending which will lead to product shortages and much higher prices in any recovery. Memory, for example, has seen no capex at all for three years. They are surfing the wave of innovation, and will cash in big time from the mobile computing revolution, cloud computing, and the virtualization of data centers.

During the last tech bubble, the industry did not have the global market that it does today. Now, demand from the rising emerging market middle class is kicking in, as it is for commodities. The nine month tech rally we saw in 2009 could  just be the down payment of a decade long bull market in these stocks, which will end with another bubble.

When John Chambers, a first class manager, discussed Cisco’s (CSCO) outlook after announcing blowout Q4 earnings, he was so effusive he sounded like he was on ecstasy. Take a look at Juniper Networks (JNPR), JDS Uniphase, (JDSU), Sandisk (SNDK), Micron Technology (MU), and lithography toolmaker (ASML). Long dated call spreads in all of these make sense on a decent dip.

For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, or listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/ .

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