Riding the High-Tech Wave
In this section, you’ll…
- Learn how to hold high-tech stocks without risking your financial health
- Learn how to find out on-line just what a company does
- Add two high-tech leaders to your portfolio
Combining High-Tech and Low(er) Risk
Despite the high-tech boom…and bust, it’s still a good idea to have tech-stocks as part of your portfolio. Technology isn’t going away. But moving forward, investors will want to see a much stronger track record of profits in addition to rapidly growing sales.
So what qualities are we going to look for to get some lower risk, high growth stocks into your portfolio?
| Big Market Capitalization: | We want to find those companies that are worth a lot – at least according to investors. We’ve somewhat arbitrarily set our cut-off point at $5 billion. That cuts our selection down greatly. |
| A Long and Happy History: | We want to find those companies that have proven and consistent performance – at least three years of numbers under their belt. |
| Strong Growth: | In both sales and profits. The stronger a company’s growth, the higher the price investors are willing to pay for its stock. In short: higher-growth companies are rewarded with higher P/Es. |
Market Capitalization is the total market value of a company or stock. Investors generally divide market capitalization into 3 basic segments: large-cap, mid-cap and small-cap.
The Goods On Growth
Just how much growth should we ask of the companies we want to put in your blue-chip portfolio? We’ll need to set some benchmarks for two types of growth we’re seeking to generate a quality short-list.
| Growth in Sales | |
| Requirement: | a three-year average of increasing sales by at least 20 percent a year. |
| Growth in Profit | |
| Requirement: | our company picks make money, and have increased their profits at a minimum of 20 percent a year for the last three years. |
With these simple benchmark requirements, we’ve just cut a pack of literally hundreds of high-tech companies down to around 20 contenders. Now, there’s just one more simple, but effective test we need to apply.
Using P/E Ratios for High-Tech Stock Picking
To narrow down our list of potential high-tech stocks further we’re going to get rid of those with sky-high P/Es -meaning those that are trading at a multiple (the stock price compared to the company’s earning per share) of 60 times or higher.
In other words, we’re not willing to pay more than $60 for a share that earns us $1.00. That gets rid of another handful of companies, leaving us about a dozen to choose from.
Go With the Gorillas: Out of the dozen to now choose from, we’re going to pick the gorillas – namely Microsoft and Oracle. You have probably already heard of Microsoft.
Please Note: This is just an illustration example. We are not suggesting you to buy or invest in Microsoft or Oracle shares.
We’re now going to buy $5000 worth of Microsoft shares (ticker symbol MSFT) and make it the first tech-stock holding within your portfolio. Once you’ve retrieved the current stock price using the QUOTES & RESEARCH function, divide it into $5000 to determine how many shares of Microsoft you can buy.
Using P/E Ratios for High-Tech Stock Picking
The second company, Oracle, is also well known but has less of a consumer profile than Microsoft. In many instances, you’re going to hear or know of a company but not necessarily know what it does.
Fear not. In today’s online world, you can get a brief but comprehensive overview of almost any publicly traded company – from the name of the president to the products and markets it does business in. We refer to this overview as a company ‘snapshot’.
The PEG ratio (price-earnings-growth) is surpassing the P/E ratio in popularity because it incorporates growth as well as share price and earnings.
