US share tips: Time to get back into tech

When it comes to the technology sector, it rather looks like 2006 will be another 1991, says SG Cowan on Barrons.com. That should cheer investors – 1991 ushered in a long period of technology share outperformance, thanks to a “tremendous” level of product innovation.

When it comes to the technology sector, it rather looks like 2006 will be another 1991, says SG Cowan on Barrons.com. That should cheer investors 1991 ushered in a long period of technology share outperformance, thanks to a "tremendous" level of product innovation.

So what is the hot new product driving this cycle likely to be? Music phones, says Michael Comeau on TheStreet.com. Building on the success of last year's runaway hit media platform, the iPod, Apple (AAPL, $74.02) will now probably make its own foray into the world of the MP3-enabled cell phone, rolling out a suitably "cool" and appropriately premium-priced mobile phone of its own by the year's end.

Still, even if it does, that doesn't make Apple shares an automatic buy. For starters, expectations are so high, says S&P's Megan Graham-Hackett, that Apple's shares are far from cheap: they are currently trading above their dotcom peak and are high relative to their historical p/e too. Also of concern is the fact that competition is getting tougher: Microsoft's recent deal with Viacom's MTV Networks is a precursor to its launching a digital music service to compete with Apple's iTunes, for example.

Nevertheless, the sheer ubiquity of the iPod means there are good related investments about in 2006. A case in point, according to JMP Securities, is PortalPlayer (PLAY, $28.82), which is the "key" supplier of the system-level media player chip in Apple's iPod and video players. While the low-end flash MP3 player market looks like a prime candidate for commoditisation, PortalPlayer should be able to maintain its "high-end dominance" on account of both its design and its platform strategy, which enables its customers, like Apple, "to offer highly differentiated media players" a characteristic that it should easily be able to transfer to new markets, such as high-end cell phones. Trading on 18 times earnings for 2006 and with a share price target of $32, PortalPlayer is an obvious candidate to outperform the market given "its secular growth rate of 20%" and hence price-to-growth ratio of just under one.

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