The Hottest Investment Opportunities in Tech Stocks Sector Right Now
Companies / Tech Stocks Mar 19, 2015 - 11:07 AM GMTBy: Money_Morning
William Patalon writes: Although I speak with Money Morning technology guru Michael Robinson almost every day – and share his comments and recommendations with you on a regular basis – it has been some time since we actually engaged in a full-fledged question-and-answer session for your benefit.
Today I'll share that Q&A with you.
In it, Michael – editor of our Nova-X Report and Radical Technology Profits advisories – details his outlook for tech stocks, outlines a risk-management strategy every investor should follow (especially now), and highlights the half-dozen tech stocks that will point you down the path to meaningful wealth.
Michael explains why today's seemingly outrageous valuations can be justified.
Here's an edited transcript of that interview.
William Patalon III (BP): Michael, the Nasdaq Composite Index recently eclipsed the 5,000 level for the first time since the dot-com bust-up of 2000. That brought the gloom-and-doomer crowd out of the woodwork in droves. But you have an interesting take on this. You've said that – while volatility will likely increase in the near term for all stocks – you are more confident than ever for the longer-term investment outlook of Silicon Valley and high technology.
Michael A. Robinson (MAR): That's right. In all the years I've been around Silicon Valley I've never seen so much innovation reaching a point of critical mass all at the same time. A recent research report I read said that, on average, we're seeing roughly $1 billion worth of new tech opportunities coming out per week.
We are well beyond what I call the "Tech Tipping Point." Bear in mind that, back during the whole dot-com saga of 2000, most folks had dial-up Internet. Now we have broadband that is at least 100 times faster. Which gives us Netflix Inc. (Nasdaq: NFLX), Pandora Media Inc. (NYSE: P), and such Apple Inc. (Nasdaq: AAPL) services as iTunes and Apple TV.
There were no smartphones, no tablets, and no connected car. Amazon.com Inc. (Nasdaq: AMZN) was just selling books. There was no such thing as cloud computing. And e-commerce was hardly the threat to brick-and-mortar stores that it is now.
Despite these differences, the stock prices we're seeing for technology firms today remain quite reasonable. The Nasdaq 100 has a forward P/E of 18.75, pretty much in line with the S&P 500's forward valuation of 17.5.
BP: In line – which doesn't reflect the much higher earnings growth you get from technology firms – correct?
MAR: That's right.
BP: And there are other differences, too, aren't there?
MAR: There are, Bill, there are.
Back in 2000, most tech firms didn't pay a dividend. These days – and, in fact, you just shared a report with me on this – a big part of the growth in dividends is coming from the tech sector.
BP: Not to mention the billions in buybacks we're seeing from high-tech companies.
MAR: That's right. And we're seeing all this – the dividends and the buybacks – because tech firms have been generating enormous amounts of cash for years.
BP: You and I talk pretty much every day. So I'm exceptionally aware of your bullish outlook for high-technology companies. In fact, it's a view – a long-term view – that we share. We both believe that, for the first time ever, there's a technology "ecosystem" that's taken shape. And that ecosystem represents a powerful profit generator.
MAR: Absolutely correct, Bill.
BP: So let's explain this to our readers. So we have these "pools of innovation" – specific ones such as the cloud, Internet of Everything (IoE), wearables, Big Data, digital payments and others – each representing standalone growth-and-profit opportunities.
MAR: And big ones, at that.
Actually, that's a great place to start. So before we move onto the whole "ecosystem" concept, let's talk about these "pools of innovation."
We're talking, here, about billions of dollars' worth of growth potential in each of these discrete sectors. I mean, if someone wants proof – you know, numbers – look right at mobile. We're shipping more than a billion smartphones a year, and just the mobile-payments part of the industry is expected to hit $720 billion by 2017 – a tripling in size in roughly five years.
The value of cloud computing is expected to reach $270 billion by the end of this decade. By that time, the Internet of Everything will be worth nearly $1 trillion, and Cisco Systems Inc. (Nasdaq: CSCO) says the profits alone from this sector will hit $14 trillion in the years ahead.
Big Data is expected to be worth $32 billion by 2017. And the year after that, just the MEMs (microelectromechanical systems) slice of the sensor market will be worth $22 billion – having doubled in just six years.
BP: And don't forget semis – semiconductors – which are native to just about everything these days.
MAR: Right. Last year, chip sales set a new record. Total semi sales came in at $335.8 billion in 2014. That's a year-over-year increase of nearly 10% from the year before.
Not bad for a business that's supposed to be "mature."
BP: The difference, of course, is that – for the first time ever – these pools of innovation are converging to create "ignition points" for hyper-growth ….
MAR: And hyper-profits.
BP: That's why this is a time of such remarkable opportunity for investors.
MAR: Yes, it really is a unique point in time. Never before have we been able to look and see so many converging, or overlapping, technology trends. They drive each other. They reinforce each other. And they magnify each other.
It's just such a powerful concept.
BP: You shared a great example with me during one of our calls earlier this week. We dubbed it the "Super Internet." Tell the readers about it, too.
MAR: Okay, sure. Absolutely. Look at the IoE – the Internet of Everything. This "Super Internet" will connect trillions of devices all over the world. That, in turn, will continue to drive demand for semiconductors and sensors needed to make common objects become "intelligent."
BP: A true "ignition point."
MAR: That's right. And what's so exciting is that the semis and sensors are merely the start of this mega-convergence. All those connected devices will create a tidal wave of Big Data to sift through, analyze, make use of, and store. That's more data than individuals can store locally, which will help drive cloud computing. We'll need software to analyze and use the data. And faster computers. And portable storage devices so analysts, scientists, students, and investors can use small slices of that data.
BP: Once it's been ignited, you can see how this becomes a truly self-perpetuating cycle.
MAR: You can, and we're not even finished.
Look at the "connected car" – a topic you, Bill, were way ahead of the curve in telling your subscribers about. That's another "ecosystem" altogether. We're selling more than 16 million cars and light-duty trucks a year in the United States alone. Starting in 2018, all of them will have backup cameras.
BP: Which is great for a company like Ambarella Inc. (Nasdaq: AMBA).
MAR: Absolutely. And the convergences – the "ignition points" – don't end there. Not by a long shot. Millions of vehicles will also have lane-assist, collision-avoidance, self-parking and self-braking technologies – driving demand for sensors, semiconductors, and software. These cars and trucks will come equipped with de facto tablets and integrate to Bluetooth and Wi-Fi, again creating more demand for cloud storage and retrieval and setting up even more Big Data flows.
BP: So how does the investor derive maximum benefit from what clearly is a major, massed profit opportunity? I mean, we know that the "trick" – and I hate to use that term – is to get into the long run. To do that, you need to avoid near-term miscues, which become so much easier to make when markets are volatile.
MAR: That's right. Yes, we will have downturns in the market, as we always do, but this is no time to sit on the sidelines. On the other hand, you can't just throw caution to the wind.
BP: For markets like this one – any, in fact – you have a three-tiered strategy for risk management and maximum profit. Could you talk about that? Let's start with how you manage risk when buying stocks in an environment like this – the so-called "Cowboy Split."
MAR: The split you're talking about – and which your subscribers have used to their advantage – involves making staggered entries on stocks that we believe have a lot of upside… but that could face some near-term downside risk due to market volatility. The strategy works very well in a choppy – but up-trending – market like the one we're dealing with right now.
You start by buying a portion at market. Then you put in what's called a "lowball limit order" – meaning, for instance, that you buy another "tranche" when the price falls by say 20% or so.
Doing this allows you to buy on the dips in a disciplined, systematic way. You avoid getting stopped out of a potential big winner and can really bolster your gains. It's not unusual for the gains on the discounted portion to be double those of that first entry.
BP: The second part of your risk-management strategy involves your willingness to take profits. In strong bull markets, I know you use something called the "free-trade" strategy. But in more uncertain markets like this one – which we've referred to as "Moneyball Markets," in homage to the Oscar-nominated baseball flick we both like – you pull the trigger on profitable trades a bit more quickly. Explain why.
MAR: This all goes back to the portfolio-management tools we discussed a moment ago.
I have a standing rule I call the "free trade." Whenever a stock has gains of 100%, you should sell at least a portion of it. If you were to sell half, you'd have a "free trade," because you recoup all your original investment and are then playing on the house's money.
But in choppy markets like we have today, I advocate taking smaller gains along the way. These days, I've been known to take some gains off the table at the 25% or 30% mark.
BP: Especially when those gains come quickly – as in days or weeks after first placing the trade.
MAR: That's right, Bill. Recently, in my Nova-X Report, we took gains on one stock that was up 35% and another that was up about 45%. No, these aren't "free trades," but they're still market-crushing gains that we've protected from volatility.
BP: Okay, the final piece of this a defined risk-management technique that's designed to cut losses short, while ensuring that, with profitable trades, you keep at least some of that profit, should the stock reverse course after a gain.
MAR: What you're referring to here, of course, is the "trailing stop."
This tool lets you cut losses short and lock in gains – kind of on autopilot.
Now, I realize you use a 25% "stop" in Private Briefing. In my advisories, I typically set a stop 20% below our purchase price. And that "stop" moves up as the stock surges, in essence "trailing" the stock as it moves higher.
BP: Run a quick example to show how it works.
MAR: Sure thing, Bill. For instance, if your stock is up 20%, set the stop at your entry. You'd lose some profits but walk away with all your original capital. If you're up 40%, set it so you make 20% no matter what happens, and so forth.
BP: At this point, are you concerned about a correction? If so, how concerned? What would it look like, and how would you play it?
MAR: Look, I believe we are in the midst of a generational bull market, especially for tech. But we're not immune from the laws of finance.
At some point in every bull market, we get a correction. It's not only expected, it's healthy. It shakes out the weak money, the speculation – and gets investors more sharply focused on meaningful value creation. It's kind of like clearing out dead vegetation so the next forest fire isn't as severe.
The truth is no one at this point knows exactly what the correction will look like in terms of speed, depth and duration. But my general plan is to look for bargains.
BP: What's your outlook for the U.S. economy? How about for the global economy?
MAR: In the United States, we're on pretty sound footing. The great untold story of the recovery is that about $2 trillion of the capital the Federal Reserve pumped into the system is still with the banks in what's called an "excess reserve trap."
Here's what that tells me: The economy has been mending pretty much on its own. Consumer confidence remains high, business CEOs are still planning to expand and we recently have had the best stretch of jobs growth we've seen in years.
New technology is driving a massive auto sales cycle that is also helping the economy and driving more demand for tech.
Globally, growth is a challenge. Europe is stimulating to catch up with the United States and to take advantage of the strong dollar. China's growth has slowed but is still around a very healthy and robust 7%.
But even with those struggles, tech makes an impact. As you reported in one of your columns, Bill, Intel Corp. (Nasdaq: INTC) has ramped up PC-chip production in Vietnam and has ignited a massive tech-investing cycle in that emerging economy.
BP: What sectors do you like?
MAR: What sectors don't I like? [Laughter from both.]
Well, life sciences is at the top of the list. We are looking at decades of steady growth. Just the 76.5 million U.S. baby boomers will drive demand for drugs, medical devices, and backend support like diagnostic tools, the cloud, and data analytics.
We are nothing without semiconductors, so I think you have to have at least some exposure to microchips. Semis are integral to smartphones, wearables, data centers, routers, so-called "smart TVs," autos, avionics, and much more. Sensors are in that segment, as well, and will see years of growth.
One area we haven't talked about much lately is "Miracle Materials." Again, touch-sensitive glass is integral to the world around us. So, too, is silver as a key electronics component – and it's oversold right now.
I would add to that wearables, where we're just getting started, mobile security and payments and, of course, the cloud and Big Data.
BP: Could you share a few favorite recommendations?
MAR: Sure thing. And it's interesting, because I believe a number of these are stocks you've brought to your folks in the past. But I still like these here.
First, since we're talking about "ecosystems" in technology, we have to talk about Apple. It actually started this ecosystem discussion.
I also like the aforementioned Ambarella as a semiconductor play on 4KTV, IP surveillance, and on the hugely popular GoPro Inc. (Nasdaq: GPRO) wearable cameras. I know you like Ambarella, too, and that your folks have done quite well with it.
I've talked about Bitauto Holding Ltd. (NYSE: BITA) as an e-commerce play on China's car market. That stock just crashed and is trading at $50.10. At that price, I'm swooping in "Cowboy Split" style and riding it for the long haul.
Bill, I know that you've been a big proponent of another Chinese e-commerce heavyweight – Alibaba Group Holding Ltd. (NYSE: BABA). It's a bold call, but one that – given your long-term time horizon – I like a lot.
And I think it's worth noting that – after you made that "call" – MarketWatch columnist Shawn Langlois gave you the nod by making your "Alibaba is the Next Wal-Mart" analysis his "Call of the Day." That wasn't a small deal. Even after that, such heavyweights as billionaire George Soros and Daniel S. Loeb, founder of New York-based hedge fund Third Point LLC, took big stakes in Alibaba – which gives your profit thesis some heft, in my opinion.
In biotech, I still see a great deal of potential for Repligen Corp. (Nasdaq: RGEN), which makes protein A, used throughout the industry. That stock jumped more than 15% one day last week but still has a lot of upside left.
Finally, just backtracking to a comment I made a moment ago, I think there are great opportunities in the "Miracle Materials" market. We've entered a period I like to refer to as the "Golden Age of Materials Science." Much focus is being given to graphene and carbon nanotubes. But you don't even have to get that radical to profit. Just look at glass – plain glass.
Or maybe not so plain. Corning Inc. (NYSE: GLW) is a terrific play on the materials-science revolution. And the smartphone screens it makes are just one of its businesses. It's a company that has managed to reinvent itself over and over. And a year ago – before GT Advanced Technologies Inc. (Nasdaq: GTAT) turned into a high-tech debacle and its "sapphire" material was being accepted as the new standard – folks were writing Corning's epitaph. Once again, Corning put the naysayers back in their corners. Now it's developing a sapphire material of its own.
It's just a well-run company.
BP: Thanks, Michael. It's always great to host one of these "sit-down" talks with you.
MAR: I feel the same way.
BP: So we'll both wish you folks a good day – and good rest of the week.
More from Bill: Click here to learn how to get exclusive access to Bill Patalon's special report on the one country where 80% of the world's new PCs will be produced in 2015. It's not South Korea, Taiwan, or Mainland China. You'll discover the two best ways to capitalize on the big-time profit opportunity that this powerhouse country represents.
Source :http://moneymorning.com/2015/03/19/the-hottest-opportunities-in-tech-right-now/
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