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Quarter-End Insights

Our Outlook for Tech & Communication Services Stocks

We strongly favor high-quality names in the current environment.

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  • Recent data points paint a mixed near-term demand picture.  
  • Firms with durable competitive advantages are better-positioned to weather economic downturns and competitive threats.
  • The recent sell-off has expanded the opportunity set of high-quality businesses selling at attractive valuations. 

Data points coming out of the technology and telecom sectors continue to paint a mixed, somewhat sluggish, near-term demand picture. Firms that operate within certain subindustries, such as analog chipmakers, semiconductor equipment manufacturers, and IT services firms seem cautiously optimistic about the second half of 2012, while telecom equipment providers and enterprise hardware firms have sounded a decidedly pessimistic tone.  Cisco Systems (CSCO),  Hewlett-Packard (HPQ),  Dell (DELL), and  NetApp (NTAP) all delivered tepid outlooks in their most recent reports, as weakening demand from Europe and a stingy public sector in the U.S. are weighing on results. Still,  Oracle's (ORCL) relatively upbeat outlook provided in late June suggests that there is growing global demand for enterprise IT products and services, provided that the value proposition is compelling. At this point in time, it's difficult to tell if we're at the very front end of a protracted cyclical slowdown or if the hardware vendors are simply experiencing a slight pause in demand, coupled with various firm-specific issues. 

Grady Burkett does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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