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The Information Technology sector

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INFORMATION TECHNOLOGY SECTOR OVERVIEW As of 31 January 2004, the Information Technology sector comprised 18.54 percent of the S&P 500. The sector in our portfolio is comparatively underweighted, then, accounting for only 17.1 percent. This particular sector is divided into 3 sectors: Software and Services, Technology and Hardware Equipment, and Semiconductors and Semiconductor Equipment. The three largest companies in the Software and Services Industry are Microsoft ($298.3 billion market cap), Oracle ($72.5 billion), and SAP AG ($51.7 billion). These are by far the largest companies within this industry, since the next largest by market cap is only $15.2 billion. The Technology and Hardware Equipment sector is similarly top heavy with International Business Machines ($167.4 billion) being the largest. In addition, Cisco Systems, Inc. ($159.4 billion), Nokia Corporation ($104.5 billion), and Dell Corp. ($87.1 billion) are major companies in this industry. The Semiconductors and Semiconductor Equipment industry is led by Intel ($196 billion) and followed by several companies bunched together in a range from approximately $20 billion to $50 billion in market cap. Among these leaders are Texas Instruments ($53 billion) and Taiwan Semiconductor Manufacturing (42.1 billion). Because of the great potential in each of these industries, we will further examine each of them in our proceeding analyses. BUSINESS ANALYSES The sector as a whole moves in a cyclical pattern, with some inelastic industries being the exception. Generally, when the economy is doing well households and businesses are more likely to invest in new technology. However, some components of this sector represent industries that are essential to society, such as communication. SOFTWARE BUSINESS ANALYSIS The Software and Services industry is currently somewhere between middle growth and nearing maturity stages of the life cycle. It would not be fair to place the industry into either one of these classifications, since the sub-industries (Software & Internet Services) are for the most part not in the same phase of the life cycle. The industry would currently be classified in the High Growth phase of the business cycle. ...read more.


Also available for free download is OpenOffice, which is an office suite similar to Microsoft Office. This free software bundle is almost as powerful as Microsoft Office, but it is improving rapidly. TECHNOLOGY AND HARDWARE EQUIPMENT This sector maintains a broad range of interest from both businesses and households. Providing instruments such as personal computers, wireless phones, mainframes, and other various computer equipment, the need for these products has become an integral part of many societies. This creates a constant demand for such products. The Technology and Hardware Equipment industry is a broad industry composed of sub-industries such as Communications, and Computers and Peripherals. Communications is a rapidly growing sub-industry because of heightened demand for high quality communications, whether it is through high-speed Internet connections or wireless phones. Telecommunications hardware especially is growing rapidly. As the demand for cellular phones grows both here and abroad, this industry will see continued expansion. Computers and Peripherals is a sub-industry that is in the maturity stage of its life cycle. While there is always room for growth and improvement in the industry, any radical growth in this sub-industry would probably be an inception of a new sub-industry rather than an expansion of the current. With the industry being mature, several manufacturers need to look to expand market share in order to increase revenues. This heightens the level of competition between firms. In such a global market, there are several smaller foreign firms that could attempt to gain more market share by producing at a lower cost. This is true for producers such as Legends, Inc. China which is rapidly gaining market share within China. SEMICONDUCTORS AND SEMICONDUCTOR EQUIPMENT Semiconductors and Semiconductors Equipment relies heavily on the sale of computer chips and some memory devices. While it may seem like a homogenous industry, there are several different technologies that fall into this category making it more diverse than it seems. ...read more.


We are fairly confident in this recommendation. Several industry experts see promise in the Internet sub-industry, as communications and technologies improve. In fact, Value Line ranked it second in a list of timeliness by industry. The semiconductor industry is also ranked favorably, as Standard and Poor's just last week rated it as a "Buy". There are some schools of thought that suggest contrary opinions. Some scholars concluded after examining past bubbles, that the stock market bubble of the late 90's has yet to fully burst. Their primary argument is that the market did not fall far enough before recovering. Other similar opinions are likewise abstract, and give little regard to the current happenings in the market and in the world. Currently the fund's investment in the information technology sector is high by comparison to other sectors. However, this is a diverse sector, with several opportunities. Furthermore, other sector analyses have suggested that money be shifted from their sector because of little or no growth. While we maintain that a diverse portfolio is important, we strongly feel that the information technology sector offers a vast array of opportunities and has the potential to give superior returns to other sectors. We feel that it is in the best interest of the fund to take advantage of some of the most enticing opportunities within the information technology sector rather than simply spread the money across the other sectors with little reason to do so. We can increase our holdings in this sector while maintaining a well-balanced portfolio. We recommend that the Software and Services industry should be weighted similar to that of the Semiconductor industry, but greater than the hardware industry. This recommendation follows that the industry has many positive net present value (NPV) projects: Internet Services, Wireless networks, and Open source software. As the industry undertakes these projects the individual companies will reap the benefits of abnormal returns. The industry is projected to generate above average returns for the next 3-5 years. At least 25% of the firms in this industry are ranked with a "1" for timeliness by Value Line. ...read more.

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