Tech stocks snap two-day decline on Wall Street relief rally; Xero, Pacific Edge gain

Tuesday 15th April 2014

New Zealand tech stocks led the local market higher in morning trade, snapping a two-day decline as an overnight relief rally on Wall Street saw investors return to tech and biotech stocks. Xero and Pacific Edge rose.

Xero, the cloud-based accounting software company, rose 0.5 percent to $29.44 after declining 35 percent over the past 18 trading days. The stock has soared 49 percent the past six months after the Wellington-based company raised $180 million in October, selling 9.92 million shares at $18.15 apiece.

Pacific Edge snapped a seven trading-day sell off to be the morning's biggest gainer rising 5.9 percent to $1.07. The Dunedin-based biotech company has plunged 34 percent in the past month and 39 percent from a record high of $1.76 in February.

"Has the heat come out of things? A little bit of it has come out, but there is still probably a reasonable amount of hot air in those stocks," Mark Lister, head of private wealth research at Craigs Investment Partners told BusinessDesk. "Could they fall further? Yeah I think they probably could."

"If there is more volatility offshore and those sort of bigger markets in America you could definitely see the likes of Xero falling further than from where it is currently, or it could have stabilized now, and that's the million dollar question."

The tech-heavy Nasdaq Composite Index rallied overnight after heavy selling last week saw it decline to its lowest level since February, leading some to call the selling a "tech wreck". Over the past month tech and biotech stocks have been sold as investors questioned the ability of the stocks to deliver the profits implied in their high valuations.

"The pull back, and the same in the US, has been very much concentrated to those high growth sectors where these stocks which were trading on excessively high valuations and at the end of the day just got far, far too expensive," Lister said.

Wynyard Group, a security software firm, rose 4.9 percent to $2.35. SLI Systems, the search engine developer, advanced 5.3 percent to $2.00.

"The thing that makes these stocks difficult to value is they don't yet make a profit, you're buying future profits which we don't know when those will really eventuate," Lister said. "You really are buying that longer term growth story and putting your faith in the longer term ability of these companies to deliver in the future."

Xero is trading at a price to earnings ratio of negative 97, while Pacific Edge is trading on a ratio of negative 37. That compares with a ratio of 19 for construction and building products company Fletcher Building.

Lister said investors were still looking for growth options and were attracted to the strength in the New Zealand economy, which is the first in the Western world to raise interest rates after keeping them low to stimulate the economy during the global financial crisis.

"I consider Fletcher Building to be a growth stock, but it is a whole different kettle of fish to Xero isn't it?" Lister said. "It's growth we can see and feel and understand, and that growth is right on top of us today, whereas Xero is a stock that's certainly growing but it's very hard to put your finger on where the share price deserves to trade. "

Fletcher Building rose 0.4 percent to $9.63. New Zealand's largest listed company has advanced 13 percent year to date.

BusinessDesk.co.nz

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