We have been tracking the monthly revenue figures published by Hon Hai, Quanta, Asustek, Compal, Wistron, and Inventec. These large Asian manufacturers, or OEMs, are an important part of the technology supply chain as they manufacture notebook PCs and other electronic devices for firms such as Apple (AAPL), Hewlett-Packard (HPQ), and Dell (DELL). The monthly revenue trends give us important insights in the health of the technology industry.

The results of the last few months bear the marks of three trends: inventory restocking, the release of Apple's iPhone 3GS, and the continuing popularity of netbooks. While June tends to be a seasonally weak month, this past June was the clear exception. Total revenue for our tracking list of Asian OEMs was $10.3 billion, up 30.2% month over month and 26% year over year. The strong results were driven by inventory replenishment along the technology supply chain and the introduction of the iPhone 3GS. Hon Hai, the manufacturer of the iPhone, posted a 40% month-over-month gain in June.

July was another good month with total revenue increasing 1.7% sequentially and 8.7% year over year. However, one company, Compal, was responsible for almost the entire increase. Compal's revenue rose 23.9% sequentially and 54.9% year over year. The company is well positioned with Acer at roughly 45% outsourcing share and is riding the netbook boom. On the downside were Quanta and Wistron (down 4.8% and 9.6%, respectively), while Hon Hai was flat sequentially.

August results began to reverse the gains made in recent months as total revenue fell 4% sequentially. This is a concern because August typically falls into a line of sequential increases as suppliers ramp up for the holiday season. The negative result was largely due to the struggles of Hon Hai, the largest component of our index, where revenues fell 16% sequentially and 25% year over year. However, there were bight spots such as Asustek, which rode strength in netbook shipments to 15% sequential growth. After shipping 1.1 million netbooks in the second quarter, the firm expects to ship 1.8 million units in the third quarter.

As we see more data from the back-to-school and holiday seasons, the next few months should provide useful data points to help investors determine if fundamentals are catching up with the market rally. The slow start to the season has not instilled great confidence in the recovery, but the most critical months are yet to come.

Valuations by Industry
The one-way rally in risky assets such as equities continued this quarter and has brought the technology sector into the range of fairly valued to overvalued.

Technology Industry Valuations
	Star Rating	Price/Fair Value*	P/FV Three Months Prior	Change (%)	Uncertainty Percentile**
Application Software	3.00	1.00	0.85	17.6%	59.6%
Computer Hardware	2.66	1.14	1.02	11.8%	88.3%
Electronics & Computer Distribution	2.56	1.09	1.18	-7.6%	94.7%
Semiconductors	2.96	0.98	0.84	16.7%	63.8%
Data as of 09-14-09. *Market-Weighted Harmonic Mean **Ranks the industry's fair value uncertainty (most uncertain =100) based on the aggregate market-weighted uncertainty ratings of each industry's underlying stocks.

While there may still be individual technology stocks that are undervalued, we think it will be difficult for most technology stocks, especially the lower-quality names that have led this rally, to appreciate much further. A substantial and lasting economic rebound appears to be have been priced in by Mr. Market, and if such a scenario fails to materialize, the recent rally could easily reverse. As evidenced by the price/fair value ratios, current prices offer very little margin of safety. Of course, we could easily have another liquidity-driven asset bubble courtesy of the Federal Reserve. In that case, fundamental analysis will have little bearing on stock prices until such time as the bubble bursts.

Our Top Tech Picks
The market rally has made compelling technology buys fairly scarce. Here are our favorite ideas at this time.

Top Tech Sector Picks
	Star Rating	Fair Value Estimate	Economic Moat	Fair Value Uncertainty	Consider Buying
Microsoft		$32.00	Wide	Medium	22.40
SunPower		$75.00	None	Very High	30.00
Compellent Technologies		$16.00	None	High	8.00
KLA-Tencor		$45.00	Wide	Medium	31.50
Autodesk		$28.00	Wide	Medium	19.60
Data as of 09-25-09.

Microsoft (MSFT)
The disruptive change brought about by cloud computing will challenge Microsoft's core Windows and Office franchises, but it will also present the firm with an opportunity to capture a larger share of enterprise IT spending.

 SunPower (SPWRA)
The future of the immature and rapidly growing solar industry remains fraught with uncertainty. Still, we believe SunPower has the technology and business model that will allow it to become one of the industry's strongest companies.

 Compellent (CML)
Compellent Technologies is one of several young companies in the storage industry that found quick success by developing advanced storage technologies. Despite formidable competition from industry giants, we like Compellent's focused strategy and expect the firm to continue securing market share in the midsize market.

 KLA-Tencor (KLAC)
KLA-Tencor occupies a sweet spot in the chip equipment industry because of its dominant position in the process diagnostic and control market.

 Autodesk (ADSK)
We believe that Autodesk will continue dominating the computer-aided design (CAD) industry, and its strong competitive advantage, coupled with a sound revenue model, leaves the company well positioned to endure the brunt of the global economic slowdown.

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