Tech stocks offer the promise of good growth. But they are tricky. Analyzing their idiosyncrasies is vital to understanding them, such as knowing that they fall into two rough classifications. Start by realizing that they can generate unwarranted enthusiasm among investors.
When the general news stations start running financial stories, I get nervous. That usually signals froth in the market, or at least in part of it. We see the initial public offering market, particularly in technology firms, behaving very similarly to that of the tech wreck back in 2000.
Some new issues coming to the market have spotty or no earnings. According to data from the market website SentimenTrader, the percentage of IPOs with negative earnings is hitting levels not seen since near the peak of the technology bubble.
Beyond that, it is tempting to bundle all of technology under one label. But that is a huge mistake.
You can’t weigh each company using the same scale. Oftentimes, technology companies fall into two categories, “old tech” and “new tech.” Examples of old tech are Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), and Cisco Systems (NASDAQ:CSCO). A new tech list includes Netflix (NASDAQ:NFLX), Twitter (NYSE:TWTR), and Facebook (NASDAQ:FB).
Problems with tech stocks are a major reason that the overall market started getting choppy in March. But shares of the old-tech trio, each firmly profitable, are all up slightly since then. The new-tech threesome initially took a dive after April 1 but rebounded. Only Twitter remains down, about 24 percent.
Technology stocks in general are more volatile that other sectors of the U.S. economy. Volatility simply means the rate of price change both positively and negatively. Academics say that these stocks typically have a higher beta (which measures risk in relation to a benchmark like the Standard & Poor’s 500), and stock enthusiasts say they offer more excitement. Both statements lead you to believe no tech investments are for the faint at heart.
The problem with that thought is that the term “technology” is very broad. There are numerous industries in the tech sector, but even more so, the fundamental characteristics of the companies are across the spectrum.
The one characteristic most of them have in common: The technology industry has more net cash right now than any other sector. That is only one metric but an important one.
Silicon Valley is expanding at a rapid rate and companies are seeing cash flood in partially due to low interest rates, as well as investors getting dollar signs in their eyes. Venture capitalists are constantly on the lookout for the next big thing, hoping to uncover the latest Mark Zuckerberg, founder of Facebook, to invest with before the company goes public.
Since many technology companies are acquiring one another, there are more large swings taking place in share prices within this sector. This can make an investors job more difficult in uncovering the value of different technology companies – and understanding which ones have a potential for a long-term track record while others may just be high-fliers that burn out like so many did after the tech bubble burst in 2000.
As the investing landscape changes for the tech sector, remember not to group all companies together. Painting with too broad a brush does you no favors.
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Originally written by Joseph “Big Joe” Clark, CFP, the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
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