Given the high-risk, low-quality counters generally evident in the local information technology sector, investors must be able to distinguish between good companies that are cheap and 'just cheap companies`. Unfortunately, barring a few high quality companies, the bulk of South African IT companies are just cheap. This is the view of Claude van Cuyck, IT analyst of Gryphon Asset Management, commenting against the background of a global meltdown in the IT sector.
"Local and global IT companies are expected to continue treading water over the short term until we see clear signs of an improvement in world economies. Once the leading indicators for the sector start bottoming out and improving, investors will be better positioned to take a view on the expected recovery of the sector.
These indicators include:
* A resumption of capital spending growth in the US and a turning point in the OECD (Organisation for Economic Co-operation and Development) World-leading indicator.
* A slow down in the rate of profit warnings and signs that a bottom in the in the IT capital spending cycle has been reached.
* Improved sentiment in the telecommunications industry.
* A re-rating of the highly cyclical semiconductor industry.
"Once the leading indicators have shown signs of a bottom, investors will be more certain of a re-rating of the Nasdaq. One may find other sectors in the economy re-rating first and technology would then follow soon after that as it tends to perform later in the economic cycle as capital spending rises. The re-rating will be swift and sharp," says van Cuyck.
He says in terms of the local market, where Dimension Data accounts for 62% of the local IT index`s market capitalisation and the view on Didata will really dictate the direction of the local IT sector. This will, in turn, be highly dependent on the performance of the Nasdaq, as there is a strong correlation between our local IT sector and the Nasdaq.
"Although the company is facing a short term earnings stall, this is a function of the economic slowdown resulting in companies reducing their IT spend. Up until its recent profit warning, Didata has had an impeccable track record. A good company does not become a bad company overnight," he says.
"Frankly, there is no short term catalyst that will cause the local IT sector to re-rate, unless we see very definite signs of a bottoming in global economies. The catalyst for Didata to re-rate will be greater earnings visibility for the financial year 2002 or a sudden re-rating of the Nasdaq."
The DiData share price dipped below R18 in early morning trade to R17.75, before recovering slightly, changing hands at R18.05 by 11.30.
Related stories:
Investors continue to hammer DiData
Share