SMTGF SMA Solar Technology AG (PK)

   By Polya Lesova 
   Of MARKETWATCH 
 

German technology stocks have outperformed blue chips over the past year, but high valuations and the uncertainty around solar-power shares cloud the outlook for the sector.

Like the Nasdaq Composite index in the U.S., the TecDAX has rallied much more than the benchmark DAX index. The substantial surge in the share prices of a number of heavily weighted stocks and a tendency to buy into tech in the early stages of an economic recovery are two of the reasons for this outperformance.

Through Friday morning, the DAX , which consists of the 30 largest German companies in terms of market capitalization, is up 25% over the past 12 months. In comparison, the TecDAX index has rallied 68% in the same period. The index includes the 30 biggest companies from technology sectors that rank below the DAX shares in terms of market capitalization and trading volume.

Similarly, the Nasdaq, the U.S. tech benchmark, has gained 45% over the past one year, outperforming the Dow Jones Industrial Average, which rose 24%.

"The outperformance [of the TecDAX] was very much linked to what we saw in the U.S.," said Heino Ruland, equity strategist at Ruland Research GmbH. "Tech stocks are becoming a very cyclical industry. They had quite a run last year because investors were betting on a recovery."

"But will that continue? I doubt that," Ruland said. "Tech stocks will be a little bit left behind, in part because one of the big drivers within the tech industry has been solar energy and the incentives are being cut dramatically."

Within the TecDAX, solar-power shares, such as Q-Cells (QCE.XE) and SMA Solar Technology AG (SMTGF) , constitute an important subsector. The German government recently announced plans to cut subsidies that had driven the industry's strong growth in recent years. As a result, solar shares have come under selling pressure and are clouding the outlook for the broader technology index.

Technical factors partly explain the TecDAX rally, since the shares of several heavily weighed companies have gone through the roof.

One such stock is semiconductor maker Infineon Technologies AG (IFX.XE), which was part of the TecDAX between March and September last year. Its shares soared over 500% in the last 12 months.

Another stock is Aixtron AG (AIXA.XE), a provider of deposition equipment to the semiconductor industry, which is up nearly 470% in that period. Executives at Aixtron declined to be interviewed for this story.

Raik Hoffmann, European equity fund manager at DWS, said that Infineon's addition to the TecDAX "definitely had quite a significant impact."

"We would have still had a very good performance," Hoffmann said. "The TecDAX is a very concentrated index. It is very much influenced by the heavyweights."

Hoffmann has a moderately positive outlook for the TecDAX.

"Most of the companies are rock-solid and profitable," he said. "The question is what kind of valuation you want to pay for."

While the outlook for solar-power stocks is uncertain, opportunities for stock-picking do exist within the TecDAX, according to fund managers.

"It was easier last year to show this outperformance than it will be this year," said Birgit Ebner, portfolio manager at Frankfurt Trust. "If you take a look from a bottom-up perspective, we still have some very interesting companies in TecDAX. We can still be very positive on Aixtron."

Aixtron makes equipment for the production of compound semiconductors that are mainly used for LEDs, which are more efficient and live longer, Ebner said.

"We think this is a long lasting trend and Aixtron will very much benefit from it," she said.

Ebner manages the Postbank Megatrend fund, whose benchmark is the TecDAX. The ten largest holdings of the fund include Aixtron, Dutch health-care firm Qiagen N.V. (QGEN), Software AG (SOW.XE), and electronic payment provider Wirecard AG (WDI.XE).

"Within the bio- and med-tech sector, Qiagen could be one of the outperformers," Ebner said. "They have global leadership in kit-based sample preparations solutions, and strong exposure to molecular diagnostics which is growing over-proportionally. We expect Qiagen to grow organically and also through acquisitions."

Qiagen provides sample and assay technologies. Sample technologies are used to isolate DNA, RNA, and proteins from any biological sample, while assay technologies are then used to make specific target biomolecules visible for subsequent analysis.

Shares of Qiagen are up 18% over the past 12 months.

Another interesting company is Wirecard AG, which is profiting from the trend that classic distribution channels are moving online, according to Ebner. Wirecard's share price surged more than 100% over the last year.

Commenting on the main risks facing the TecDAX, Ebner said: "It is mostly everything that has to do with the solar industry. We have indications on the subsidy cuts but what is very uncertain is how the demand will adjust to the lower subsidies."

"What could compensate for this shortfall in demand in Germany could be new initiatives from President Obama with regards to alternative energy," she said. "If we get more clarity on the actual time frame, this could help the German solar companies."

For now, however, it is best to stay away from German solar stocks, Ebner said. For investors who want some exposure to the sector, she recommends picking a company like Centrotherm Photovoltaics AG (CTN) , a provider of technology and services for the manufacturing of crystalline solar cells and thin film modules.

Centrotherm is not very dependent on the German market and has a big exposure to Asia, Ebner said.

Solar stocks have certainly sold off recently. In the past month, Q-Cells is down 12%, SolarWorld AG (SWV) fell 21%, and SMA Solar Technology is down 8%. Manz Automation AG (M5Z.XE) dropped 12% and Phoenix Solar AG (PS4.XE) is down 25%.

Hoffmann of DWS also expressed caution about the solar sector.

"Going forward, solar stocks have quite a high rating in the index and it's hard to predict what will happen with feed-in tariffs," he said. "Sentiment will be negatively affected over the next couple of months."

Polya Lesova is reporter for MarketWatch, based in Frankfurt.