Will Tech Stocks Continue to be Winners?

Eric Schurenberg: Technology stocks have always been the motorcycles of the stock market; Exhilarating when the weather is good, dangerous when the roads are slick. Well tech stocks are coming off one of the exhilarating phases right now and joining us to discuss what's behind that run and what lies ahead in the future is Ken Allen, Vice President of T Rowe Price and President of the group's science and technology fund. Ken thanks for joining us. Ken Allen: Thanks for having me. Eric Schurenberg: You had a really good run. It is nice to be a sector fund when your sector is really hot. What's behind it? Ken Allen: Well it's been a certainly good time to invest in tech stocks and I think the biggest thing behind it is where we were entering the year and tech is a very cyclical industry and investors were very wary of how cyclically depressed revenued earnings in the sector could become. What's actually happened is the industry was this time much healthier relative to the last recession 2001 and therefore while revenue is down for the industry it’s held up better than people expected. Eric Schurenberg: Are we seeing earnings come through yet? Ken Allen: I would say that earnings are coming through to the extent that they're not as bad as what's expected. Not by any means has the technology industry escaped the recession, escaped the down turn. It's more that things have not been as bad and that's a good thing relative to where expectations were. Eric Schurenberg: Less bad isn't a good enough story any more. Spending has to come from somewhere and yet it doesn't look like there's much indication that business is going to start spending and no indication at all that consumers are going to go back to the way they were. Where the where is’s the e going to come from. Where are the earnings going to come from? Ken Allen: Well it's very important that we do continue to get better signs from the economies in terms of what spending will look like as we get into 2010. One of the beneficial things is that this year the depressed levels of revenued earnings will create easier comparisons for next year. So a couple of core areas of the last decade in technology spending are obviously PCs and servers and server units are down over 20% so far this year versus last year. PCs are down over 5% so far this year versus last year would be down more like servers are if not for the phenomenon of Netbook computers which has added enough of a tail wind to offset some of the down turn so things have been again to the earlier point not as bad as expected but quite bad and so we have these comparisons we get into next year but hopefully with an accommodating economy we should get better spending both on the consumer side and the corporate side but it does a lot of ways come down to what happened and what happens to the economy. Eric Schurenberg: Ok good. How does a fund like this, a sector fund like this with a narrow focus fit into an investors overall portfolio? Ken Allen: I think that it can be a good component of a diversified approach to personal finance. I wouldn't advocate putting a large portion of one's money in it and probably a diversified fund is as good an option so as to get exposure to broader areas versus banking essentially on one area of the economy one area of the market doing well for a given period. Eric Schurenberg: Good to know. How bout some names? Ken Allen: So one name that I think is talked about a lot but the stock is generally not as well regarded as it should be is Microsoft and so the stock trades at a significant discount to the market actually on cyclically depressed earnings levels that they're at now and I think that earnings expansion is going to be quite rapid in the next couple of years both as hopefully the economy continues to show better signs and also as Microsoft gets into their Window's 7 product cycle and the launch of that is October 22nd and I think what that'll mean is that Microsoft will get better pricing mix for the operating system and because margins in that area are so high so much of that falls through to earnings and off the currently really weak levels of earnings I think the expansion is going to be very strong in that investors aren't anticipating that to the extent that they should be and as that comes through the stocks should do quite well. Eric Schurenberg: Ok good. Ken thanks a lot. Expanding multiples, rising earnings sounds like a pretty good combination. Ken Allen: I think so. Eric Schurenberg: Alright thanks Ken. Ken Allen: Thanks for having me Eric. Eric Schurenberg: I'm Eric Schurenberg for CBSmoneywatch.com thanks for watching.