National Security a Safe Play in IT - Zacks Analyst Interview - With Larry Orlowski, Sep 11, 2006

The second half of 2006 has begun with some real fluctuation in the market. Amid longer-term economic concerns, how is the IT industry expected to perform? For answers, we turned to senior tech analyst Larry Orlowski, CFA. Are there any areas within the general IT market that you think might make good investments at this time? Sure I do. I think the computer services market – particularly companies such as CACI International (CAI) and ManTech International (MANT) which are good candidates to receive accelerated funding from the federal government in 2007 – would be good places to be invested within the tech market. Let me explain my thinking behind this. I'm finding myself pretty sensitive now to what's happening in the economy, especially with regard to the announcement recently that the productivity of the U.S. worker has slowed while labor costs continue to rise. My concern is that the Fed will sit up and take notice of this, believe that there may still be some inflation in the pipeline, and continue to raise interest rates. Now, the housing sector is another concern, and if interest rates keep going up we may see the issue of negative equity arise, which would force people to sell their houses. Higher interest rates would then tighten credit and the cost of borrowing, not just in terms of home mortgages but also in terms of consumer spending. And if spending slows, then I certainly would not want to overweight my investments in the tech market. Which brings us back around to the computer services companies you do like. Right. Certain factors make me think that some companies may be well situated if we do see an economic downturn. At this time, I have a Buy on CACI, which delivers IT applications and infrastructure to improve communications and building mission-critical solutions at the Department of Defense, the Department of Homeland Security and the intelligence industry. The stock price has fallen recently – there was some disappointment in the market when organic growth slowed – but I think now would be a good time to buy. I see accelerated growth in 2007, so I think CACI is a good stock to own. So you see this as a solid long-term investment? Yes, and I also see it as a defensive play. Congress wants Defense and Homeland Security bills to be signed into law before the mid-term election break. Even if congress swings Democratic after the election, neither party wants to be seen as weak on national security issues. So I think CACI and ManTech – on which I have a Hold at this point, but may give some consideration to upgrading in the near future – will have a strong fourth quarter because I think funding will accelerate for these companies' offerings. Politically, national security remains a hot topic. So the funding is definitely there, especially for those companies focused on the premium part of government IT – mission-critical solutions for intelligence operations. This is one area where investors can seek refuge, even if we see a dramatic economic downturn over the coming quarters. On the opposite side of this, what areas of tech would you recommend investors get out of? Tech is cyclical these days; it has grown so big. With that in mind, I wouldn't want to be too exposed to the PC market or other traditional parts of IT. I just think this market is quite mature, and the economic slow-down scenario that I'm wary of would only make things worse for this group. Have you noticed any increases in business IT spending? Not really; businesses have continued to under-invest in IT. Though this is subject to change. Business spending, as you may know, was supposed to pick up the baton from consumer spending that has kept the tech market somewhat buoyant over the past few years. And if business spending does indeed start to pick up, I would change my mind on the general broad IT market. But the fact of the matter is that business spending in IT has not been robust for a number of years. You'd have thought spending would have picked up by now, as companies are interested in refreshing their product cycles. The question for most businesses, though, is: If consumer spending continues to dampen, why should we invest in IT? Some companies don't want to be investing in IT if they see demand weakening, and will likely hold off until they see a more attractive opportunity. Larry Orlowski, CFA is a senior analyst covering the IT industry for Zacks Equity Research. Content Courtesy: Zacks Investment Research | Blog Home| VitalStocks Home