Tech stocks tank as sales growth forecasts wither

What little confidence investors had in tech stocks eroded further today.

Shares of Intel Corp. (NASDAQ: INTC) and Hewlett-Packard Co. (HPQ) got crushed along with many other big-cap tech stocks after analysts from Morgan Stanley said the sector was the most vulnerable among economically sensitive industries. The tech-heavy NASDAQ Composite Index fell 3.7 percent. Even other tech stalwarts such as Google Inc. (GOOG) and International Business Machines Corp. (IBM), which have performed well this year, declined in the brutal sell-off.

For technology investors, there is plenty to worry about.

Global technology spending is expected to rise 2.3 percent this year to $3.5 trillion. Earlier last year, technology researcher Gartner Inc. forecasted a 5.8 percent increase. Another forecaster, iSuppli, cut its sales growth forecast for semiconductors. Poor PC sales have forced Hewlett-Packard to lay of 24,600 workers. Chief Executive Mark Hurd has said he doesn't expect the economy to improve for the rest of the year.

Nonetheless, the tech sector may appeal to investors looking for a bargain.

The NASDAQ Composite Index is down about 11 percent this year, outperforming the broader Dow Jones industrial average, which is off 18 percent. Many of the best-known companies in the sector including Intel, H-P, Dell Inc. (NASDAQ: DELL) and Microsoft Corp. (NASDAQ:MSFT), are down by double-digit percentages. IBM shares are up less than 1 percent. Apple Inc. (NASDAQ: AAPL) has eeked out less than a 2 percent gain. Google has gained 8 percent this year.

Loomis Sayles & Co. technology analyst Tony Ursillo urges investors to be cautious

"The valuations in this sector look quite attractive on a free cash flow basis and their healthy balance sheets," he said in an interview. "But it's not clear that earnings have bottomed. "

There are bright spots. Ursillo argues that software companies that rely on maintenance revenue are doing well and that the services business is proving to be "less cyclical" than others.

"The overall PC market is going to be down 10 percent this year," Ursillo said. "Dell and H-P are having trouble because of weak overall demand because of netbooks."

In today's market, brighter spots in one area mean dimmer lights for others. As hope for new spending in 2009 diminishes, the tech sector may well stumble further in the weeks ahead.

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