Bill Fleckenstein: Investing appeal of large-cap technology stock

Contrarian Chronicles7/9/2010 8:00 PM ET

The market's best bet right now

If there's a sizable rally, big technology stocks seem most likely to outperform. But take care: The era of high valuations is over, and the future still looks rough.

By Bill Fleckenstein
MSN Money

As of July 1, the Nasdaq-100 ($NDX) had declined 10 sessions in a row, while the S&P 500 ($INX) had fallen in nine out of its previous 10 days. Though that's a relatively short period in the grand scheme of things, it certainly seems to have helped foment the recent bearish mentality, even making bears out of those who are generally bulls.

For instance, in a Bloomberg interview July 2, Barton Biggs, who had been bullish until just recently, said he had cut his stock allocation nearly in half and, in particular, was selling big-capitalization tech stocks.

As longtime readers know, I am no generic stock bull, but if I had to be bullish on something right now, it would be big-cap techs. These companies are not particularly expensive by recent standards; they all have strong balance sheets and a lot of cash; and they are mostly winners worldwide. They also have certain macro elements in their favor. Tech is one area where America excels and which benefits from Asia's growth.

(One caveat on valuation, however: Just because price-to-earnings ratios are lower than they have been, that does not mean they can't go lower.)

Thus, if I had to make a bullish bet, particularly through earnings season, large-cap tech would be my choice. (And if Federal Reserve Chairman Ben Bernanke starts to hint at launching a new round of quantitative easing, a rally could get downright frisky.)

For whom the bellwether tolls

As for which big-cap tech names to watch, I have made the point several times -- practically ad nauseam -- that I believe Microsoft (MSFT, news, msgs) is attractive, given how well-positioned it is. I believe if you can't make money owning a company like that, you'll have a hard time making money buying stocks in general. (Microsoft is the publisher of MSN Money.)

I bring this up because the latest report from my good friend Fred Hickey, the author of the High-Tech Strategist newsletter, presented a number of reasons Microsoft ought to do well. I would encourage folks to subscribe to Hickey's service to read all of what he had to say, but he made one statement in particular that pretty much sums it up: "I have been following this stock for over 22 years, and with the exception of the crash-level prices in late 2008 and into 2009, I've never seen Microsoft so cheap, or so misunderstood." (For a year's subscription, send a check for $140 to High-Tech Strategist, P.O. Box 3133, Nashua, NH 03061.)

Click graphic to see interactive chart

Graphical chart for MSFT
Of course, that doesn't mean this idea will work, but if it doesn't, I expect the S&P 500 is going to be trading much lower.

As for the near-term direction of the tape, as I stated in my daily column on my website July 5, I feel that given the recent carnage and angst, there is a reasonable probability of a decent rally getting under way. That would confound some of the nouveau bears and almost certainly trip up the fast money quantitative-trading crowd that has been bombarding the tape, since it will have to shift gears in a hurry.

However, it will be just that: a rally. If things play out along those lines, it may very well be time to start thinking seriously about putting on some short positions, preparing for a move back down.

Time to stock up on compression shorts

For a longer-term outlook, here is my friend Comrade Kuppy's somewhat-patriotic, nonpartisan rant about the direction the country is headed and how that affects investing. In short, he lists a host of issues that argue for shrinking ratios of stock prices compared with profits, an outcome that I have felt is unavoidable.

No one knows how low price-to-earnings ratios are headed, but the era of high valuations that modern-day investors have grown accustomed to over the past couple of decades are not likely to prevail in the decade to come.

End note

Eric King of King World News once again did a terrific job of asking me new and interesting questions in our latest interview. Listen in here.

At time of publication, Bill Fleckenstein owned or controlled shares of the following companies mentioned in this column: Microsoft.

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