Have IT Companies Bottomed Out?
August 19, 2011 | In: Stocks Analysis
Most of us have seen large IT companies trading at very high valuations and be known as defensive stocks in a falling market. But suddenly everything has changed and they are market leaders on this free falling market. It is natural to suddenly get attracted to some of these stocks that have crashed 20-25% in the last couple of weeks. For example, TCS has fallen from 1200 odd levels to almost 900. Infosys has crashed from 2700 to 2200 now and HCL Tech from close to 500 to 380. These stocks can see some 5-10% bounce backs due to traders activity but don’t get carried away.
Even after this crash, I don’t see a reason to buy into IT companies. IT companies are still trading at a higher valuation compared to many other stocks and any sign of global problems will lead to further fall in the IT companies. Now IT companies would not be the only ones to fall but my concern lies in if there is any recovery on our markets, will IT lead it? I doubt it. IT sectors are linked with US and Europe and any recession there will lead to slowdown in the IT companies. So I believe IT would not recover till there is improvement on that front. So IT would not just lead the markets on the downside but underperform on the upside too.
The biggest problem with most of these IT companies are the valuations, they were extremely rich and even after this correction, it is still very rich compared to other companies. So if there is a slowdown in the companies earnings, who will want to pay such a premium for these companies and not for the ones that are trading at a lower valuation and are performing better? It will take time for the markets to understand and equally re rate but it should happen, provided there is indeed a slowdown on the global front and it doesn’t turn out to be fake expectation. I would be interested in bottom picking in these companies if the valuations were a bit cheap, since then it is easier to say that downside is limited.
It is very difficult to say if IT companies have bottomed out because if we see US/Europe markets fall more, then we can see further fall in our markets led by IT. Infosys and TCS like large companies falling 5-6% on a single day is indeed worrysome. I don’t think I have the guts to do bottom picking in the IT sector on a day like today. I would want to wait and watch for now as they might be a further fall in them. Also, make sure to not get carried away if these companies go up by 5 – 10%, because that would certainly be no less than a dead cat bounce. Just keep track of the global front as unless there is good news from US/Europe recovery front, IT companies will continue to face pressure. There is no hurry to buy into this sector, it will give you an opportunity to buy in future, so wait and watch rather hurrying on this troubled sector.
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