Below is the Technology Sector Risk:Reward matrix that I sent to Thebe Stockbroking clients a couple weeks ago (click to enlarge it!). It represents the12m implied return of each tech stock on the Y-axis and the 36m price volatility of each stock on the X-axis.

In other words, you want the stock to as high up as possible on the graph (high potential upside) and as far left as possible (low risk).

Have a look at the previous 2011 Tech Sector Risk:Reward matrix for a comparative: Technology Sector Risk/Reward.

While EOH was my top pick last year in this sector, the share has risen over 74% since then and re-rated from a PE of 10.9x to on over 15.0x. The ICT services group remains one of the best run group's on our local ICT sector (and, in fact, the whole JSE for that matter), but I can no longer justify a valuation this high. Perhaps it is PSG-led herd investors that have pushed EOH beyond its fair value (and even its 12m TP!), but my hand has been forced by fundamentals to downgrade EOH to SELL.

Personally, after downgrading EOH, I have sold my shareholding in the Group, put some of it into MTN (yes, I do occasionally buy blue chips when the upside is sufficient!) and left the rest as cash for its optionality value.

On the other hand, ISA and Blue Label Telecoms have moved fantastically into healthy BUYING territory. ISA's move has been driven by share price weakness, despite the fact that a weaker ZAR makes the business look more attractive. Blue Label, though, has been undervalued for a while, but the repurchase of Microsoft's shareholding in itself and an excellent trading update have all added further upside potential to its valuation.

Once again, Datatec is efficiently priced and I view them as Rand-hedged HOLD. Business Connexion and Gijima remains with a lot of implicit risk. And Datacentrix's failed BEE deal and its over-exposure to commoditised hardware sales (including those in public sector, which its failed BEE deal puts at risk) remain downside risks in my mind.

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