Technology stocks advice for long-term investors
Not that long ago, the economic landscape as it pertained to technology included primarily technology hardware, such as PCs and other electronics. “But now, the way I look at it is there’s a new economy,” says Trust Point’s Ryan Bergan, MBA, Portfolio Manager. “Over the last 10, 15 years, we’ve transitioned to new technology where we have online commerce, cloud computing, software innovations, and increased connectivity across a wide range of platforms.” Bergan says tech stocks are a viable investment option, especially as the pandemic drove the need for greater technology use, whether that is connecting via video conferencing platforms, shopping online, or watching TV shows or movies through streaming services.
The trend toward increasingly enhanced technology, pandemic or not, should also make technology investing a dependable long-term strategy. “As an investor, you want to have exposure to technology stocks,” Bergan says. “And you could argue today that it could be a structurally higher part of your portfolio than it’s been in the past because of the innovation that’s happening in the world.”
The Rise of FANMAG
FANMAG stocks–Facebook, Apple, Netflix, Microsoft, Amazon and Google—have experienced tremendous growth in the last decade. Their collective value was just over $700 billion in 2009. Today it’s nearly $5 trillion.
An Increased Role
Bergan notes that he would never recommend a client invest in tech stocks alone. He recommends a diversified portfolio that includes different regions of the world and different business sectors. But now is the time for tech stocks to play an increased role. The last several years have given rise to the “FANMAG” companies, a technology or technology-related group comprised of Facebook, Apple, Netflix, Microsoft, Amazon and (Alphabet) Google. A few years ago, those six companies represented a single digit percentage of the S&P 500. Currently they represent more than 20 percent. That growth relative to other stocks has been incredible, and largely justified because of their high profitability and cash flow generation.
Also, technology companies are often valued based not on their current earnings, but their future potential earnings. One interesting dynamic today, Bergan says, is that real interest rate yields are very low, which increases the value of future earnings. So for companies that might not have significant earnings today, but are trending higher, that gives them more value. “So in this environment today, over the next probably couple of years, that may make technology stocks more attractive in a portfolio assuming relative valuations are reasonable,” Bergan says. Bergan notes that because FANMAG stocks are so hot, they do come at a greater expense, which reinforces the need to diversify.
Trends to Follow
Bergan says investors interested in tech stocks can keep an eye on a couple of different things to help make decisions. One of those is data analytics, or looking at patterns of behaviors, such as those of online users, to help predict the need for certain products and services. Connectivity is another trend to follow, Bergan says. There are still populous regions of the world—India for instance—that do not have reliable widespread internet access.
“If you can provide connectivity to the citizens of India, reliably inexpensively, then you have even more eyes online and can provide a boost to any company that has an online presence,” Bergan
says. Small software companies are also worth watching by investors given their innovation and potential to be acquired by larger companies.
If you are not yet invested in tech stocks, but want to be, Trust Point can help you determine how they make sense within your portfolio. Because of the high value of some FANMAG stocks, it might be better to wait on those options. “If they were to have a pullback on the value of those stocks, then they become much more attractive to the investors and might provide a good entry point for those who don’t have exposure to them,” Bergan says.
Years ago, FANMAG stocks might have been seen as more risky, but today many of these technology companies are hugely profitable, largely serving as defensive holdings within a portfolio, and able to withstand market fluctuations. “Given the market volatility and uncertainty around some investment decisions, tech stocks are an option that has proven strength and longevity,” Bergan says, “despite the difficulties that we’re facing today.”