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IT stocks: Attractive again?

Mar 8, 2013

US stocks seem to be going from strength to strength. The Dow Jones Industrial Average, a benchmark just as popular there as the Sensex, rose to a level above 14,000 on March 5, 2013. The DJIA had last hovered around the 14,000 mark in October 2007.

Back home, the IT stocks haven't done badly either. Between January 1, 2013 and March 6, 2013, TCS's, Infosys's and HCL Tech's share prices have seen upward movements between 20%-30%. That these have jumped appreciably in such a quick time is indeed surprising. Especially against the backdrop that IT wasn't a hot property until recently.

It could well be that expectations of strong economic growth in the US have suddenly made investors bullish about the sector. We at Equitymaster, however, believe that thanks to Mr. Bernanke and his team at Fed, cheap money has been chasing the US stock market. We are circumspect about real economic growth happening over there. Two major reasons illustrated below would drive home the point:

Household incomes remain low:Real (adjusted for inflation) median US household income was US$ 50,054 in 2011. That was the latest figure released by US Census Bureau. In 2007, the figure peaked at US$54,489. We do not think that the 2012 data would beat the 2007 peak.

Housing prices remain subdued: House prices are hovering around the US$ 180,000 level. However, they are still below the 2007 peak by almost 25%.

The above and other data points give us the impression that it would be too early to start expecting a sustained economic recovery in the US.

It should be noted that IT stocks' performance in 2012 was really good in terms of fundamentals despite a slowdown in the US. Volume growth was mixed with TCS and HCL Tech reporting superior volume growth than Wipro and Infosys. However, none of them witnessed major pricing pressures as such. More importantly, the deal pipeline has improved for all the Big 4 players and all of them added clients in the big ticket bracket (more than US$ 50 m).

Conclusion: We affirm that there is still value in the IT sector. However, we would stress the need for bottom-up stock picking. We suggest our subscribers to focus more on the company that they are investing in. They should be giving proper attention to the company's financial performance, strategy and valuations, rather than blindly buying them just on the basis of news of US economic recovery.

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