PE Tech Report

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US tech stocks can still shine despite sluggish growth  

Despite the US economy facing the prospect of 8% unemployment and 2% growth through to the end of this decade, there are still opportunities to find stocks that will thrive, according to William L Paternotte, Partner and Senior Client Advisor Brown Advisory, the Baltimore-based independent investment firm. In this uncertain economic environment, one of the sectors with the most potential is technology…

Tech and tech-enabled sectors of the S&P 500 have grown three times as fast as US GDP over the three years ended December 31, 2011 (6% vs. 2%) and are projected to continue expanding more rapidly than global GDP for the foreseeable future. Far from threatening overall employment levels, technology is adding to job growth at twice the rate of the economy.
 
The quality that probably best describes a company’s ability to overcome the challenges of a weak economy is innovation, and it’s one that our research team keeps high on the list of criteria when evaluating stocks for our portfolios, particularly those with higher growth prospects. No matter what the environment, there are always a few management teams that demonstrate a unique ability to create new products or services to gain competitive advantage and drive revenues and earnings at a superior rate.
 
Despite its relatively rapid growth, the tech sector as a whole sells at valuation levels similar to the rest of the market. At the same time, there is little correlation between the growth rate of individual companies and the valuation of their stocks—giving rise to a huge opportunity for knowledgeable investors to find stocks that offer substantial growth potential while selling at modest multiples.
 
That opportunity is not lost on our research analysts, whose specialised expertise is focused on this very task. It’s no accident that our portfolios are currently tilted toward the technology sector, with overweightings almost across the board.

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