Even with the S&P 500 Information Technology Index up by roughly 21% this year, senior equity research analyst Dan Ives foresees a strong further rally in tech stocks for the rest of 2021. Supported by the Federal Reserve’s steady messaging and the sector’s strong fundamentals, we can expect to see tech stocks rising 7% to 10 % through year’s end.
While there could be a headwind or two, concerns over the Delta variant are likely to bode well for the tech industry, as people continue to work from home, stream content, and order things online. Emerging technologies such as artificial intelligence, machine learning, 5G communications, and the Internet of Things also further the potential of investing in tech stocks. Here are three things you should know about choosing tech stocks in 2021:
Avoid using traditional valuation methods
Traditional investing requires you to evaluate the stocks you’re interested in, usually through traditional valuation methods like earnings per share, price to earnings ratio, or asset pricing formulas — but it doesn’t work that way for tech stocks. Companies in the industry have to continually invest back into research and development. Video communications software Zoom, for instance, were the clear winners of the pandemic economy. However, their rapidly cooling sales growth plunged stock prices down 15%. To stay ahead of the competition, they recently announced that they will buy cloud-based customer service software firm Five9.
Tech company investors have to understand that potential, rather than earnings, are what investments hinge on. This is why tech stocks often have high price-to-earnings ratios company profits seem low compared to the price of their shares because investors expect rapid future growth. It’s better to focus on key metrics like price-to-sales, which compares stock price to company revenue, or overall revenue growth for fast-growing companies without substantial profits.
Monitor tech trends closely
If you can tap into an emerging market early enough, your gains will be sizable compared to investors who are late in the game. Since technology is such a fast-paced sector, it’s important to commit to researching different markets like robotic process automation, quantum processing, blockchain, and more. Remember, blindly investing in tech stocks and assuming you’ll profit will lead to losses. You have to know what you're getting into.
To illustrate, AskMoney’s finance articles highlight how progress in 5G connectivity means investors should look at tech-adjacent companies as well. Smaller, component-supplier organizations like Qualcomm Inc. (NASDAQ: QCOM), NXP Semiconductors NV (NASDAQ: NXPI), and Corning Inc. (NYSE: GLW) are expected to grow as 5G networks become more widespread. It may also be a good idea to start looking into investing in connected technologies. Reading news and industry reports on emerging technologies will help determine your investment strategy.
Look into both tech giants and small players
In our Warren Buffett: 3 Tech Stocks Part of Berkshire Hathaway’s Portfolio feature, we talked about how Warren Buffett initially shied away from tech stocks because he didn’t understand the sector well enough. In recent years, however, his company Berkshire Hathaway investing in companies Apple, Amazon, and cloud computing-based data warehouse Snowflake. If you’re interested in buying tech but would prefer single-stock investments over mutual funds or ETFs, it’s best to follow Warren Buffet’s suit and invest in tech giants. These industry leaders are household names with a long history of solid performance, and whose market share is not eroded by the competition.
Of course, it’s ideal to diversify with game-changing small players as well. Promising social media companies, smartphone glass manufacturers, hardware makers, green tech companies, and software developers offer high rewards at high risk some companies are still in the research and development stage, so there’s no telling if they’ll ever be able to commercialize their products. As long as these companies continue to innovate and you perform due diligence, however, it’s likely you can find success.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
