Tech’s Outperformance Driven by the Big Boys

Quick what's the one stock you feel comfortable owning right now? If you
said Apple (NASDAQ: AAPL ), you're not alone. Among large-cap stocks, there
aren't many that offer the combination of Apple's massive balance sheet,
strong organic growth and promise of future catalysts in the form of hot new
products in the pipeline. It's no surprise, then, that the stock has
outperformed both the S&P 500 and the broader tech sector since the market
started going south at the beginning of May. While Apple garners all the
headlines, it isn't the only tech stock to outshine its large-cap peers in
recent months. A look at the numbers shows meaningful outperformance for seven
of the eight largest tech stocks since the April 29 top: Looking at this, one
would think that the tech sector as a whole has been a safe haven through the
market downturn. In fact, that's been anything but the case. Beneath the $50
billion market-cap cut-off, the numbers are not nearly as positive. In fact, 14
out of the next 20 largest U.S.-domiciled tech stocks have failed to keep up
with the S&P 500 since the market started to roll over. Granted, some of these
companies are stock-specific stories that would have underperformed in any
market. Hewlett-Packard (NYSE: HPQ ), Research In Motion (NASDAQ: RIMM ) and
Yahoo (NASDAQ: YHOO ) are names that jump out from the list. Still, the table
below shows that it isn't necessarily accurate to talk about "technology's
outperformance." So what's driving the outperformance of the largest tech
stocks? The simple answer is, of course, fundamentals. In terms of their
earnings, balance sheets and market positions, these companies are much better
equipped to deal with macroeconomic headwinds than most stocks in the financial
or cyclical sectors. How long stocks like Apple, Amazon (NASDAQ: AMZN ), and
Google (NASDAQ: GOOG ) remain immune to a slowing economy is up for debate, but
for now it has paid handsomely to stick with what's working. There's more to
this story than just fundamentals, however. If an equity-only fund manager needs
a hiding place, he or she doesn't have the option to buy gold or Treasuries.
The logical safe haven is large-cap, cash-rich companies with stories that have
a demonstrated ability to keep growing despite the slow economy. More to the
point, there's no "career risk" to holding Apple in your portfolio right
now. In short, these stocks have become a safe haven for dedicated-equity
managers that have nowhere else to hide. The result is that the large-cap tech
trade has become very crowded. In the short term, that doesn't matter as long
as the markets remain weak, this trade can keep working. But once the market
stabilizes and managers move back to the "risk-on" trade, these
outperforming stocks likely will represent a source of funds. The bottom line:
Ride this wave of remarkable outperformance for the largest tech stocks as far
as it will go. But recognize it for what it is, and be ready to look elsewhere
for opportunities once the VIX makes it back to the mid-20s.