Tech stocks have been market leaders for a while now, and for good reason. Stock markets are forward-looking, and technology innovation is an important driver of future gains.
But innovation is hardly limited to FAANG stocks. There is a long menu of stocks that offer tech-fueled future growth, including some old-economy names that could perhaps be described as stealth tech stocks hiding in plain sight.
Brains, not bombs, will rocket this defense stock higher
Lou Whiteman (Leidos): Leidos has always been a tough company to categorize; it's one of a handful of IT specialists operating in the staid world of defense contracting. But in recent years Leidos has been steadily building its case for consideration among tech stocks.
The military is changing, as are the companies that supply to it. In years past the value in the contracting base mostly came from its engineering and its metal-bending ability, but in an age of drones and autonomous vehicles increasingly the electronics and brains inside that metal is where the real value lies.
Leidos is positioning itself to be one of the key beneficiaries of this transformation. In 2019 the company's tech successfully guided a Navy ship from San Diego to Hawaii and back with little human intervention, turning heads and establishing its bona fides inside the Pentagon. And last year Leidos bought Dynetics, a highly respected government research shop with strong ties to the Air Force and space agencies.
Dynetics could be a lynchpin for future growth. It is the lead contractor on the Defense Advanced Research Projects Agency's (DARPA) Gremlins program, which can best be described as an effort to create an airborne drone-launching aircraft carrier. It is working with Lockheed Martin on a futuristic U.S. Army laser weapon, has contracts to develop highly classified experimental satellites, and is a key supplier of components and expertise on a number of next-generation hypersonic weapons programs.
Couple those projects with an industry-leading IT business that is using its scale to beat out smaller rivals for massive government contracts, and you have a recipe for strong future growth. The Pentagon is increasingly going high-tech, and the companies that have the capabilities to follow should do well in the years to come.
Why software is key to Ford's profit-growth plans
John Rosevear (Ford Motor): Ford, a low-growth industrial giant founded way back in 1903, would seem to be a ripe target for the "dinosaur" sobriquet. And yet Ford -- even Ford! -- is becoming a tech powerhouse in ways that will enable significant profit growth over the next several years.
That was made extremely clear in a presentation to analysts this past Wednesday when Ford laid out its strategy. Called "Ford+," the strategy builds on Ford's traditional strengths, but there's a whole lot of technology involved, and it's not just hardware technology.
Simply put, Ford is moving from traditional internal-combustion vehicles to electric vehicles with advanced connectivity. The change in powertrains is no surprise (the gist of Ford's strategy there is to defend its existing profitable turf from new entrants); but as Ford sees it, the connectivity opens up a new universe of software-enabled revenue possibilities.
Ford teased a few of those on Wednesday. Among them:
- Ford is taking a cue from Tesla (NASDAQ:TSLA) with over-the-air updates, using a new computing platform that is already rolling out in its latest models. But Ford is looking past things like feature updates to optional revenue-generating services that could be offered to existing customers. The idea, as several Ford executives put it, is that Ford's latest vehicles can actually improve over time.
- For its commercial customers, Ford is offering fleet management software features that have traditionally been out of financial reach of small- and medium-size fleet operators. As Ford's fleet customers move to electric vehicles, they'll be able to take advantage of a slew of new data-reporting features that will help them train new drivers, manage fleet maintenance, and detect vehicle problems early, all helping to maximize uptime.
Ford thinks that 40% of its global sales will be fully electric vehicles by 2030. That's not too surprising to those who have been paying close attention to the auto industry in recent years. But Ford also thinks that the new connectivity could enable significant top- and bottom-line growth. Just in the commercial-fleet space, Ford thinks that its revenue will rise from $27 billion in 2019 to $45 billion by 2025 -- thanks to those new connectivity-enabled offerings.
Ford's stock has had a terrific run so far in 2021, rising about 70% as Wall Street and auto investors have become more tuned into this profit-growth plan. But it's still cheap by its own historical standards, never mind the standards of newer entrants like Tesla. I don't think it's a 10-bagger from here, but it could do quite well, especially once its generous dividend is reinstated, likely within the next few quarters.
Long story short: If you can afford to hold for at least a few years, Ford stock looks like a nice buy right now.
This company sells dinosaur juice -- but it's evolving
Rich Smith (Total): "Dinosaur" companies that are stealth tech investments, you say? Well, how about French oil company Total? I mean, selling "dinosaur juice" is literally this company's bread and butter!
And yet, Total isn't just an oil company anymore. Just last week, Total announced that it is joining forces with Airbus and Air France-KLM to help "decarbonize air transportation." Total developed a sustainable aviation fuel -- a blend of aviation fuel and biofuel made from used cooking oil -- to power Air France Flight 342 on an international flight from Paris to Montreal, Canada. By 2022, France will require such sustainable aviation fuels to power 1% of flights originating in France, a number that will grow to 5% by 2030 -- and Total will support that effort.
And biofuels aren't Total's only foray into tech. Also last week, Total signed a deal to provide 90 gigwatt-hours of clean energy annually, over 10 years, to pharmaceuticals giant Merck & Co. The power will be produced by Total's solar power projects in Spain. In making that announcement, Total reminded investors that it currently possesses around 12 GW of power generation capacity around the world, the majority of which is produced from renewable energy projects. Total intends to grow that renewable capacity fivefold through 2025 -- then triple it again through 2030.
Ultimately, Total says it wants to be "among the world's top 5 [companies] in renewable energies." It already arguably is a major player, through its controlling interest in solar power company SunPower. And at a valuation of less than 15 times free cash flow, and paying a dividend yield of 6.8%, Total is also not a half-bad-looking investment idea.