Greg Price Greg Shaskus Min Shen Matt Sims Chris Stuart.

Greg PriceGreg Shaskus

Min ShenMatt Sims

Chris Stuart

Recommendation100 bps increase in SIM allocation for IT

resulting in 227 bps overweight

Support:Sector Size and CompositionBusiness AnalysisEconomic AnalysisFinancial AnalysisValuation Analysis

Sector OverviewLargest Weight16 IndustriesHighly CyclicalRevenues up 8% last quarterEPS up 56% last quarterEstimated 63% increase in earnings this

quarter

Sector Market Cap

(Millions) Info Tech $ 1,966,161 Financials $ 1,742,608 Health Care $ 1,223,100 Cons Staples $ 1,167,036 Energy $ 1,148,905 Industrials $ 1,122,994 Cons Disc $ 1,100,889 Utilities $ 367,268 Materials $ 355,185 Telecom $ 288,242

Source: Standard and Poors

SIM Sector AllocationCurrently 127 Basis points overweight S&P

500 SectorS&P 500 Weight

SIM Weight

+/-

Consumer Discretionary 10.55% 10.44% -0.11%

Consumer Staples 10.91% 11.71% 0.80%

Energy 11.18% 9.76% -1.43%

Financials 16.47% 11.41% -5.07%

Health Care 11.55% 14.63% 3.07%

Industrials 10.76% 13.10% 2.34%

Info Tech. 18.91% 20.18% 1.27%

Materials 3.45% 1.64% -1.82%

Telecom 2.73% 3.70% 0.98%

Utilities 3.48% 2.10% -1.38%

IndustriesBy Market Cap:Rank Industry

Market Cap (billions)

Holdings

1 Systems Software 185.9$ ORCL2 Computer Hardware 165.3$ HPQ, NCR3 IT Consulting 142.6$ 4 Internet Software 113.7$ 5 Communications Equipment 99.5$ RIMM6 Semi-conductors 69.3$ INTC7 Services, Data 31.9$ 8 Computer Storage 23.6$ 9 Electronic Component 23.1$

10 Offi ce Electronics 13.2$ 11 Application Software 11.4$ 12 Semi-conductor Equipment 11.3$ 13 Electronic Equipment 9.2$ 14 Home Entertainment Soft. 5.8$ 15 Electronic Manufacturing 3.3$ 16 Technology Distribution 2.7$

Industry PerformanceBy revenue growth:

Industry PerformanceBy earnings per share growth:

Rank IndustryMarket Cap

(billions)Holdings

EPS (current)

EPS est.

1 Semiconductor Equipment 11.3$ 589% 221%2 IT Consulting 142.6$ 350% 173%3 Communications Equipment 99.5$ RIMM 70% 111%4 Services, Data 31.9$ 69% 313%5 Computer Hardware 165.3$ HPQ,NCR 49% 104%6 Offi ce Electronics 13.2$ 48% 80%7 Semiconductors 69.3$ INTC 45% 100%8 Electronic Manufacturing 3.3$ 39% 7%9 Internet Software 113.7$ 28% 31%

10 Electronic Component 23.1$ 21% 19%11 Electronic Equipment 9.2$ 7% 5%12 Technology Distribution 2.7$ 7% 65%13 Home Entertainment Soft. 5.8$ -6% -12%14 Systems Software 185.9$ ORCL -12% 8%15 Application Software 11.4$ -17% 158%16 Computer Storage 23.6$ -41% 114%

Industries: SummaryAttractive industries:

Semiconductor Equipment Data Services IT Consulting Computer Hardware (HPQ, NCR) Semiconductors (INTC) Communications Equipment (RIMM)

Industries to Avoid: Home Entertainment Software Systems Software (ORCL) Electronic Equipment Electronic Manufacturing

Largest Companies

Constituent Symbol Sector Price ($)Exxon Mobil Corp XOM Energy 65.23Apple Inc. AAPL Info. Tech. 253.99Microsoft Corp MSFT Info. Tech. 28.93General Electric Co GE Industrials 18.04Procter & Gamble PG Consumer Staples 62.42J ohnson & J ohnson J NJ Health Care 64.75Bank of America Corp BAC Financials 17.3Wells Fargo & Co WFC Financials 32.97J P Morgan Chase & Co J PM Financials 41.95Intl Business Machines Corp IBM Info. Tech. 126.27

10 largest companies in S&P 500:

Sector PerformancePrice Returns by Sector

MTD QTD YTDYTD Rank

Energy -4.22% 0.02% 0.11% 6 Materials -4.13% -3.74% -1.42% 7

Industrials -2.71% 1.27% 13.88% 1 Cons Disc -2.73% 3.13% 13.49% 2

Cons Staples -0.26% -1.81% 3.14% 4 Health Care -1.29% -5.14% -2.40% 8 Financials -1.40% -0.12% 10.69% 3 Info Tech -3.05% -1.34% 0.31% 5 Telecom -1.40% -2.78% -8.28% 10 Utilities -1.64% 0.75% -3.90% 9

Business AnalysisSector growth depends on

InnovationTechnological advancementCost reduction

Highly diverse with companies in growth and mature phases

Few dominant players in each industry within the sectorDependence on cutting edge technology leads to

enormous R&D costsR&D spending is 2.5 times of the automotive industry and

more than 3 times of the pharmaceutical industryR&D costs largest barrier to entry

Huge threat of substitutes and piracy

Business Analysis (cont.)Highly cyclical sector with large impact on

SIMTends to have large growth during market

recoveriesCan be highly volatile

Affected by customer and corporate spendingSignals point that both are increasing

Intel’s most recent earnings forecast signals a rebound in corporate IT spending

The iPad sold over 1 million units in just 28 days

Business Analysis (cont.)Growth potential in the smart phone and

tablet marketApple, Google, and RIM dominate the market

making it difficult for other companies to be successful

Increased competition will decrease prices and result in lower margins

Growth potential in India, China, and AfricaAs penetration rates approach 90% in

developed regions companies look for new opportunities

Other growth opportunitiesMicrosoft Office 2010 to be released in JuneIT Solution Services

Business Analysis (cont.)

Risks of W-recession or unstable recoveryLast Thursday and Friday

was a perfect example Tech stocks were hit hard Many lost all of their gains

for the year

Business Analysis SummaryLong-term

IT growth opportunities outweigh risksDemand will continue to increaseIT becoming a business staple with massive

growth potential Short-term

Corporate spending/profits continue to increase

GDP growth

Stovall’s guide to S&P Sector Rotation

Stovall’s Sector RotationIT generally does well where business is down,

unemployment is up, GDP is down, interest rates are falling and consumer expectations are down.

Fundamentals of companies can be influenced greatly by the surrounding economy

Business Cycle is used to understand the present position of the cycle and to predict what areas of the economy will be stronger in the future.

Strategy is to buy into a sector that is about to take off and sell at the peak.

Capital Spending V. IT Sector

Federal Funds Rate V. IT Sector

Velocity of Money V. IT Sector

Consumer Confidence V. IT Sector

Consumer Spending V. IT Sector

Employment V. IT Sector

Real GDP V. IT Sector

Market Pyramid

Railroad: Total International Traffic

Revenue (Indexed)

100%

125%

150%

EBITDA Margin

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0%

5%

10%

15%

20%

25%

30%

Absolute

Relative

High 26.5 1.4

Low 21.2 .8

Median 22.2 1.1

Current 26.5 1.4

Relative to S&P 500

Sector

Net Profit Margin

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

10%

11%

11%

12%

12%

13%

13%

14%

Absolute

Relative

High 12.9 1.9

Low 11.3 1.2

Median 11.8 1.4

Current 12.9 1.9

Relative to S&P 500

Sector

EPS Growth (yr over yr)

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

(%) Absolute

Relative

High 47.8 35.5

Low -18.2 -33.9

Median 16.0 -

Current .4 5.3

Relative to S&P 500

Sector

Return on Equity

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0%

5%

10%

15%

20%

25%

Absolute

Relative

High 23.5 1.8

Low 18.7 .9

Median 19.5 1.3

Current 23.5 1.6

Relative to S&P 500

Sector

Financial AnalysisStrong overall performanceGrowth potential within sector

EPS projectionsSector rotation

Sector Valuation: Info Tech (22 years)

Absolute Basis

High Low Median Current

P/Trailing E 74.6 11.1 26.1 18.9

P/Forward E 64.7 12.1 22.5 14.4

P/B 15.1 2.3 4.1 3.7

P/S 6.7 0.8 2.5 2.4

P/CF 45.8 8.2 16.0 12.1

Green= CheapRed= Expensive



Relative to SP 500


P/Trailing E 2.6 0.91 1.4 1.1

P/Forward E 2.7 0.98 1.3 1.0

P/B 3.0 0.9 1.4 1.7

P/S 3.0 0.9 1.7 2.0

P/CF 2.6 1.1 1.5 1.3

Sector Valuation: Info Tech (5 years)Absolute Basis


P/Trailing E 25.0 11.1 20.8 18.9

P/Forward E 22.4 12.1 18.9 14.4

P/B 4.8 2.3 3.9 3.7

P/S 3.0 1.3 2.5 2.4

P/CF 17.7 8.2 14.1 12.1




Relative to SP 500


P/Trailing E 1.5 0.91 1.2 1.1

P/Forward E 1.4 0.98 1.3 1.0

P/B 1.8 1.2 1.5 1.7

P/S 2.1 1.5 1.7 2.0

P/CF 1.6 1.1 1.3 1.3

Industry Valuation: Computer Hardware (HPQ, NCR)

Absolute Basis


P/Trailing E 95.1 10.4 21.9 17.0

P/Forward E 45.6 10.8 19.5 14.9

P/B 11.2 1.0 3.9 5.0

P/S 3.3 0.4 1.3 1.7

P/CF 29.2 7.1 13.6 11.2


Industry Valuation: Computer Hardware (HPQ, NCR)

Relative to SP500


P/Trailing E 5.7 0.75 1.2 0.98

P/Forward E 1.9 0.81 1.2 1.0

P/B 2.5 0.4 1.3 2.4

P/S 1.5 0.5 1.0 1.4

P/CF 1.7 0.8 1.2 1.2


Industry Valuation: Semiconductor (INTC)

Absolute Basis


P/Trailing E 135.8 11.6 23.5 26.4

P/Forward E 422.1 11.9 24.1 11.9

P/B 13.8 1.6 3.6 3.0

P/S 13.0 0.7 3.3 3.0

P/CF 37.3 6.4 14.3 9.9


Industry Valuation: Semiconductor (INTC)

Relative to SP500


P/Trailing E 5.6 0.74 1.4 1.5

P/Forward E 34.7 0.60 1.4 0.84

P/B 2.6 0.8 1.3 1.4

P/S 5.8 0.9 2.4 2.5

P/CF 2.4 0.9 1.3 1.0


Industry Valuation: Systems Software (ORCL)

Absolute Basis


P/Trailing E 75.6 9.4 26.9 15.3

P/Forward E 35.1 9.8 19.7 14.3

P/B 26.6 3.0 5.8 4.6

P/S 21.8 2.2 7.8 3.6

P/CF 65.6 8.2 19.2 12.1


Industry Valuation: Systems Software (ORCL)

Relative to SP500


P/Trailing E 2.5 0.83 1.4 0.88

P/Forward E 1.7 0.78 1.2 1.0

P/B 5.5 1.3 2.2 2.2

P/S 9.7 2.8 5.6 3.0

P/CF 3.7 1.0 1.8 1.3


Industry Valuation: Communications Equipment (RIMM)

Absolute Basis


P/Trailing E 211.9 11.0 25.4 20.9

P/Forward E 475.1 12.1 22.4 16.8

P/B 12.1 1.0 4.3 3.0

P/S 5.1 0.7 2.1 3.2

P/CF 55.5 8.8 17.6 14.5


Industry Valuation: Communications Equipment (RIMM)

Relative to SP500


P/Trailing E 10.1 0.91 1.4 1.2

P/Forward E 29.1 1.0 1.4 1.2

P/B 2.4 0.3 1.4 1.4

P/S 3.0 0.7 1.6 2.7

P/CF 3.2 0.8 1.6 1.5


Conclusions Based on Valuation:

• Sector as a whole and most industries within are currently undervalued;

• Economy likely to pick up, upside potential in this sector.

Recommendation100 bps increase in weight to 227 bps

overweightTop-line growth prospects: Office

electronics, Data Services, Electronic Equipment, Semiconductor Equipment industries

Current phase of business cycle favors investment in the IT sector

Sector as a whole and the industries are currently undervalued

Greg Price Greg Shaskus Min Shen Matt Sims Chris Stuart.

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