How to Evaluate High Technology Stocks

Evaluate High Technology Stocks

High technology is the last frontier in American business. Although these stocks have declined sharply during bear markets, they have outperformed other stocks, rebounding more sharply in subsequent recoveries.
Smaller companies developing new technologies, or making a breakthrough on an old one, have three things going for them.

These advantages:

Since they are small, the impact on their earnings from the new product or system can be significant.
They are generally free from government regulation because their earnings are often in a new field (except in the case of medicine, where the Food and Drug Administration reigns supreme).

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If the company scores a significant breakthrough, it has a chance to dominate a growing market. That’s an extremely profitable position even if the market served is relatively small.

Rules for the budding high-technology investor

Invest in a technology company only if you perceive it as serving a current social need. Some technologies are ahead of their time and are initially rejected. Example: When cable TV was introduced in the 1960s, it attracted hordes of investors but few subscribers. Today, there is a definite subscriber demand and cable TV is a far more attractive investment.
 
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The high-technology expertise of the proposed company must be a meaningful part of the firm’s business. For instance, the largest contractor in electronic warfare is General Telephone and Electronics Corp. However, that technology accounts for a mere 1% of its earnings.


But the number four in the field, Sanders Associates, gets most of its income from its electronic warfare technology. Point: Large firms don’t always have the edge in high technology or research.
No matter how attractive a scientific breakthrough may seem, don’t buy a company operating at a deficit.

Business graveyards are loaded with firms that couldn’t deliver because of their poor financial situation. Following this rule may force you to pay a little more for your stock, but it will eliminate a good deal of the risk.

Ignore the market indexes: Companies with technological superiority are not tied to a stock market environment over time. Keep current on technological innovation. Read scientific papers, magazines, and investment guides that deal with technology.

What is the best way to invest in technology stocks?

The first option for investors is to purchase individual tech stocks, which they can do through a growing number of investment apps and platforms.

Individual tech stocks can also be purchased through traditional stockbrokers, though these are increasingly online and usually have their own apps. Charles Schwab, TD Ameritrade, and Interactive Brokers are among them.

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The P/E ratio, P/B ratio, PEG ratio, and dividend yields are too narrowly focused to be used as a single measure of a stock. Combining these valuation methods yields a more accurate picture of a stock’s worth. Any of these, as well as more complex ratios like cash flow, can be influenced by creative accounting.

Bottom line

While no one can guarantee that big tech stocks will not experience volatility and dips, their long-term growth may outweigh any losses. Investors looking to diversify their portfolios should seriously consider including them in their asset mix. They provide returns that are unrivaled by any other type of stock.

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