London's High-Tech Stocks Soar
London's information technology stocks are hot, as investors have latched on to the same high-tech enthusiasm that has long powered U.S. markets.
Since the beginning of the year, the FTSE IT index of computer related stocks has risen 66 percent vs. only a 16 percent rise in London's benchmark stock index, the FTSE 100. Analysts say growth prospects remain strong.
Part of the success has stemmed from the launch of the 28-share FTSE IT index, which created demand for index constituents among fund managers. Not surprisingly, constituent companies' shares have shown very strong growth.
Analysts say these large IT shares have gained because there is a shortage of issues large enough for institutional investors to sink their teeth into.
"A lot of large caps are at a premium because institutional investors can't put too much money into the smaller shares," said Coleen Kaiser, an analyst at BA Robertson Stephens International.
Analysts say that in addition to a treasure trove of millennium bug-related work, London's IT sector stands to gain from preparations for the single European currency, as well as continuing strong demand for bread-and-butter networking solutions and IT consulting.
They say that U.K. investors are just learning to accept that high growth prospects justify higher multiples for technology growth stocks, and that has made a U.K. listing more attractive for technology companies.
U.K. IT-related shares carry an average price-earnings ratio of around 35 to 40 times, says Kaiser. Partly, that reflects the relative dearth of opportunities for institutional investors here to gain exposure to the sector, she says, which she attributes partly to a relative scarcity of venture capital.
But she argues that many of these valuations appear high only because the growth forecasts are too low.
"The fundamentals of the industry are very strong," agrees Patrick Yau, technology analyst at Nomura. Much of the demand for IT services shares is millennium-bug related, he said, as manufacturers and retailers have belatedly joined finance and services companies in recognizing the need to deal with the problem.
"Just a year ago many of these companies were trading with PE multiples in the 'teens," he said, "but now they're at 30x-plus," a level he says is justified by their growth prospects.
Yau said he expects small caps and medium-sized companies to significantly outperform the market in the remainder of the year, particularly after they undertake share splits to help increase liquidity.
Currently, millennium bug work is chewing up most companies' IT budgets, he said, but in a year or so, they'll begin to upgrade their neglected hardware, and then distributors' shares will also begin to look attractive.
Logica, which aims to leverage expertise gained in the U.K's deregulated electricity market into the U.S., is up 55 percent for the year, but remains very popular with analysts.
So iMisys, a computer maintenance and consultancy company, which Nomura's Yau describes as "extremely strong." Misys also stands to possibly benefit from index-related buying, having just been added to the benchmark FTSE 100 index.
By David Jolly