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5 Tech Sector Stocks Funds Love - views
BALTIMORE (Stockpickr) -- Funds love the tech sector right now. In spite of the fact that technology stocks underperformed the S&P 500 by a fairly substantial margin in 2011, the information technology sector was last quarter’s second-most heavily bought group of stocks.
Even though tech sector buying was big, institutional investors concentrated their efforts on a smaller group of names. Now coattail investors (the retail investors looking to emulate big name portfolio managers) should be paying attention to a handful of tech sector stocks.
To do that, we're focusing on 13F filings. Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.
In total, 3,081 firms filed the form for the third quarter of 2011, and by comparing one quarter's filing with another, we can see how any single fund manager is moving their portfolio around.
Today, we’ll focus on five institutional favorites in the tech sector.
Apple (AAPL) has topped a lot of institutional investors’ buying lists in the last quarter, so it’s no great surprise that this tech giant is on top of this one as well.
Apple has done an amazing job of creating an ecosystem around its product offerings, tying together its product range from Macintosh computers to iPhones, iPods, and iPads. Software is key to Apple’s strategy; where other computer makers saw their margins erode as their offerings became commoditized, Apple remains able to collect a premium for its products because it’s the only game in town for consumers who want to use the iOS or Mac OS X systems.
That’s a key factor in Apple’s bargaining power. Because the firm’s products are in high demand right now, Apple can negotiate favorable terms for its contracts with retailers and with partners such as AT&T (T) and Verizon (VZ). As the firm continues to expand the stickiness of its systems with new offerings such as iCloud, it should have little trouble retaining its scale.
From a financial standpoint, Apple is equally impressive. The firm currently has more than $81 billion in cash and investments on its balance sheet -- ample dry powder to return value to shareholders in 2012. Speculation over a dividend payout or a large-scale share buyback continues to keep investors guessing.
Last quarter, institutions bought $1.7 million shares of Apple’s stock. For example, Chase Coleman's Tiger Global Management increased its position in the stock by 13.3%, and George Soros' Soros Fund Management scooped up an additional 12,620 shares.
Another major tech sector target was Google (GOOG), Apple’s sometimes arch rival in the mobile phone business. Google is the world’s biggest search engine, generating revenue from an estimated 20 billion monthly clicks on its paid advertising service -- a business that still generates more than 80% of the company’s overall revenue.
Despite Google’s reliance on search, the firm has been pushing into other businesses with the goal of becoming the hub of consumers’ online lives. While these new initiatives have generated a following, they’ve largely been subsidized by the search business. We’ll want to see profitability in Google’s other units for all of those efforts to be justified.
At the same time, a massive hoard of cash puts Google at risk of overpaying for more potential acquisitions that won’t be accretive to earnings.
The firm’s most recent buy, Motorola Mobility (MMI), isn’t cheap -- but it’s more of a defensive legal posturing for the firm’s Android system than an attempt at immediately spawning a profitable mobile phone business. Still, investors should expect a $12 billion investment to do more than just protect a side business.
Last quarter, institutions bought 5.9 million shares of Google, hiking their total stakes in the firm to $103.8 billion. Expect a fair chunk of that buying to come from merger arbitrage trades. In the third quarter, Julian Robertson's Tiger Management increased its position in the stock by 17.3%, while Farallon Capital Management initiated a new 247,500-share position in Google.
While you may not think of MasterCard (MA) as an information technology stock, it is. The firm has zero exposure to lending risks, rates or consumer deposits -- instead, MasterCard runs the world’s second-largest electronic payment network.
So while the financial sector fell hard in the last quarter of 2011, MasterCard managed to get institutional investors in line to buy shares -- 2.2 million shares, to be precise. For example, Chase Coleman's Tiger Global Management scooped up 171,180 more shares of the stock, which also comprises 2.2% of Ken Heebner's Capital Growth Management, in a new 289,100-share position.
In fact (and as you’ll see), financially focused tech stocks made up a large portion of the tech sector’s biggest buying targets last quarter. In many ways, the decision to buy MasterCard is more structural than anything else: Electronic payments are slowly eroding the popularity of cash and checks as consumer look for more convenient ways to pay for the goods and services they buy. And with one of the most well-known electronic payment brands in the world, MasterCard stands to benefit from the trend.
Technicals also likely had a lot to do with firms’ buying spree in MasterCard stock. MA has shown substantial relative strength vs. the broad market in the last quarter, a statistic that statistically points to continued outperformance over a three-to-10-month time window.
MasterCard isn’t the only payment network that was popular last quarter. No. 1 network Visa (V) also generated substantial buying pressure from institutional investors. All told, institutions picked up 14.5 million shares of the firm, including Farallon Capital Management, which increased its position in the stock by 1.3 million shares in the third quarter. The stock is also one of Warren Buffett's 6 New Investments.
Visa’s top-dog status is significant for investors. The firm’s logo graces around 60% of the world’s credit and debit cards, providing the firm with a massive share of a growth market. That scale adds significant value to Visa’s network as well; its popularity makes it a necessity for merchants to accept, and that universal acceptance makes the card even more popular. The challenges of replicating that network give Visa a major edge over new potential rivals.
Investors should like the fact that, like MasterCard, Visa is primarily a tech stock. The firm doesn’t carry credit risk on its balance sheet because it relies on financial firms to actually issue cards. Instead, growing dollar volume of card transactions (including debit transactions) stands to grow Visa’s top line.
Bankrate (RATE) is another example of a tech sector name with a financial twist. This online financial publisher aggregates and distributes personal finance content on its eponymous website, helping consumers with everything from finding the best mortgage to saving for college. That positioning provides the firm with ample opportunities to sell advertising slots to financial services companies that are looking for targeted leads.
The firm IPO’d back in June after going private on the tail end of the financial crisis. Since then, the company has dramatically improved its operations and strengthened the popularity of its website. Financially, Bankrate looks strong, with a reasonable debt position and ample balance sheet cash. As long as lending and insurance continue to be confusing for consumers, this site should continue to profit by driving traffic and advertisers together.
Last quarter, institutions bought 23.1 million shares of Bankrate, bringing their total stake in this technology stock to $438 million.
To see these stocks in action, check out the Institutional Tech Sector Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.