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Hold On for Gains


By Arnie Kaufman Is the glass half full or half empty? The answer that investors give to that classic question seems to change daily, if not hourly.

Last week's announcement by the Federal Reserve Bank of Philadelphia that growth in manufacturing activity in its region slowed a bit (the Bank's index declined to 11.4 from 16 in February) caused some holders of industrial issues to sell. But many of those sellers ignored the larger picture that the Philadelphia Fed's data painted: Manufacturing activity in the region, though not as strong as last month, was up for the third consecutive month following 13 months of decline.

The economy beyond the Philadelphia area is also humming. The rapid improvement has caused David Wyss, S&P's chief economist, to raise his GDP growth estimates for the first and second quarters to 5% and 4.5%, respectively.

Despite all the positive news, there are some pockets of gloom. For those who bought technology stocks two years ago at the top, the glass is more than half empty. The S&P information technology index is down about 65% from its peak in March 2000.

We at S&P currently recommend that investors overweight technology in their portfolios. As the economy continues to improve, we expect spending on tech equipment to increase. But the inventory of tech equipment caused by the spending bubble of the late 1990s has to be either worked off or discarded as obsolete. That continues to be a slow process.

We estimate that information technology stocks in the S&P 500 are now trading at a rich 43 times 2002 operating earnings. But based on estimated 2003 operating profits, the P/E on that sector is a more reasonable 27.

The strongest growth in technology stocks may have to wait until next year. However, now is the time to take positions in anticipation of that growth. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook


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