Companies splurging on iPads could be sign of recovery

NEW YORK (AP) ― The news last week that Apple’s Steve Jobs is taking a leave of absence was a big story. But something else about the company got far less attention and could be even more important to investors this year.

Corporations “are adding iPads to their approved device list at an amazing rate,” Peter Oppenheimer, Apple Inc.’s chief financial officer, told analysts Tuesday. Apple’s products, more known for their consumer appeal, are now used in by employees of Wells Fargo, Archer Daniels Midland, DuPont and others.

Splurging on $500 iPads is a sign that the business cycle is starting to turn and that companies are starting to spend a record amount of cash they have accumulated. If the trend is real, companies will do what consumers have not ― spark a strong economic recovery. That could push the Standard & Poor’s 500 index to its third straight year of double-digit percentage gains. The last time that happened: the tech-boom days of the late 1990s.

“You’re going to see a bigger commitment to growth this year because companies have underspent for quite some time,” says Bill Stone, chief investment strategist at PNC Asset Management.

Financial, technology and energy companies are the most likely to benefit from business spending, says David Bianco, a market strategist at Bank of America. Each group is up about 3 percent this year, nearly one percentage point ahead of the overall S&P 500. Those three groups account for nearly half of the index’s value.

The continued success of financial, energy and technology stocks would point to a new stage of this bull market, which has returned nearly 100 percent since it began in March 2009. Consumer discretionary stocks, the group of hotels, retail stores and automakers that depend on consumer spending, outperformed the last two years after being left for dead during the 2008 financial crisis. Those companies are now lagging the market, suggesting that the bounce back from the lows of the recession is over.

“Consumers don’t have the income growth to sustain a more rapid pace of spending,” says Jeffrey Kleintop, a market strategist at LPL Financial. Instead, he says, businesses spending will eventually lead to a pickup in the jobs market.

Corporate spending on technology helped IBM Corp. beat analyst expectations last week. On Tuesday, IBM said that its 7 percent jump in revenue came in part from companies in the U.S. upgrading their computer systems. Its stock jumped almost 4 percent last week.

Energy companies, meanwhile, are leading the market this year with a 3.4 percent jump because of higher demand, a sign of an improving economy. Oil company Schlumberger said Friday profit in the most recent quarter rose 31 percent. And financial companies are benefiting from loans to businesses, a signal that those companies plan to expand. J.P. Morgan said on its earnings call last week that it added 400 middle-market companies as new commercial loan customers. Bank of America said Friday that demand for business loans stabilized last quarter, while U.S. Bancorp said Wednesday that all of its commercial loans divisions were improving, with the exception of real estate.

Financial companies have the added benefit of being cheap. The price-to-earnings ratio of the financial companies in the S&P 500 index averages 11.6, about half of its historical average. Financial companies are cheaper than any other group except for health care, which costs 11.2 times earnings. Even utilities companies, whose slow growth rates typically make them the lowest priced group in the market, are trading at 13.6 times earnings.

Is it too early to make a prediction that the biggest sectors of the market will continue to do well? After all, investor sentiment is at a level not seen since the market hit its all-time in 2007. That makes some contrarian investors nervous.

The market should continue to rise if history repeats itself. Since 1970, the top performing industry groups in January have gone on to outperform the rest of the S&P index over the rest of the year nearly 75 percent of the time.