Tech Stock in the Mirror, What Do I See?

Missed this until now, but my cheerfully misguided friend Herb has an entertaining diversionary post up wherein he redefines what it means to be a technology stock. Tired, seemingly, of decrying tech stocks during the current bull run in the group, Herb has taken it on himself to deploy the old debater’s tactic of redefining what it means to be tech, thus solving his sectoral problem.

Anyway, according to Herb, flailing companies that spend a lot of money for minimal growth, like Microsoft, are tech; and growing companies that spend somewhat lower percentages of revenues for more growth, like Google and Apple, are not tech. This is, of course, nutty, even if Herb has managed to corral my friend Andy Kessler into providing some supportive quotes.

(And Andy’s right, tech generally creates new markets, as opposed to media, where it’s mostly a share game. But some of tech is increasingly at the confluence of both, creating markets and gaining share. Redefining the sector away on that basis is, let’s just say, convenient and somewhat blinkered.)

Over to you HG.


  1. herb greenberg says:

    Paulie, I stand by my story, which was more than a mere post but appeared in the weekend edition of the Wall Street Journal. What I didn’t get in there is that you could also possibly argue that companies like Boeing are tech stocks, but, nah, tried to keep it simply and straight forward.
    Your pal, Herb

  2. Herb — Fair enough, the WSJ bought into this line of patter. I stand corrected.
    But let’s get to the meat of it: Sectoral definitions are always slippery, but that is no reason to toss the idea altogether. Just because Google kills the odd media company, or because Boeing and 3M spend heavily on R&D, is no reason to despair and create a new T&T&T (transportation and tech and tape) sector.
    Put differently, it is the companies at a sector’s margins that define its future, not the one from its dying past. By your logic tech has been moribund for ages because no-one is hanging magnetic tape any longer, and that is verging on sophistry, mon ami.

  3. Herb’s short article has to be read if one is to understand this discussion. Then, you will see that Google IS a media company, Amazon IS a distributor, Dell IS a manufacturer, by definition of what drives their revenue. To the extent that almost all businesses use computers and telecommunications to operate, they are all users of tech, but not necessarily tech companies any more than they are HVAC companies or commercial real estate companies because they operate out of air conditioned hi rises. Good point, Herb. And Paul, what’s wrong with a dynamic, ever-changing T&T&T sector, anyway? Or are these even relevant anymore? Do quant funds consider what sector a company’s in before trading in it, or is it done based purely on mathematics, patterns, and correlations to other stocks in any and all sectors?

  4. While some quants trade without regard to sectors, that is far from the rule. Most factor-based models load strongly on sectoral markers, and you would be leaving alpha on the table if you didn’t include them in your quant portfolio.
    No question that sectors blur at the margin, and technology blurs more than many, but is that really saying much? Put another way, saying that Dell can be understood better via manufacturing comparables strikes me as misguided. The relevant cycles/tailwinds/headwinds for Dell’s market are best understood by understanding its reliance on personal computer/notebook markets, not by knowing more about contract manufacturers in general.

  5. Impossible to define, and many thanks to you for occupying my thoughts with this subject. Here’s an interesting case: LeapFrog (LF), maker of the ubiquitous Leapster products (all electronic/tech, all educational). Sector is Consumer Cyclical, Industry is Recreational Products; however, Google Finance lists the 10 “Related Companies” as HP, Viacom, Apple, Disney, and 6 educational and/or toy companies. So even though Leapster is all electronic/tech, and spends a nice amount on R&D, and is very similar to Apple and HP among others, its sector is still Consumer Cyclicals rather than Tech. And I agree with that completely – even though I would have had no problem whatsoever with, and honestly expected them to be in, a Tech Sector classification. Impossible.

  6. there is a scoop here on the blog. msft is no longer a Technology company. Perhaps it is a textile company? And it’s growth is minimal! The standard for non “minimal” growth is over 30% I presume.