For investors who like predictability, technology stocks might not be the best place for your investment dollars. However, for investors that don't mind the added volatility that's known to come with the territory, the tech sector may the best place for your money. Here's why.
Internet Bubble 2.0? I don't think so
Back in the days of the dot-com bubble that formed over a decade ago, many tech stocks traded at what could be described as "crazy" valuations. While there are certainly tech stocks today that sport valuations eerily reminiscent of some of the quintessential dot-com-bubble stocks, there are also plenty of technology companies that trade at quite reasonable valuations.
Take Microsoft (NASDAQ: MSFT), for example. Last fiscal year, the company generated $2.63 in diluted earnings per share and reported having a net cash position in excess of $60 billion. Ex-cash, the stock trades for under 13 times its fiscal 2014 earnings, which I'd say is quite reasonable, if not downright cheap.
There are many secular trends worth investing in
In the world of technology, there are plenty of secular trends that could still have room to run. Perhaps one of the biggest trends I follow is the explosion of mobile computing. This development has created many significant opportunities across a variety of sub-segments of the technology industry.
For example, chip companies that provide components that go into the over 1 billion (and growing!) smartphones shipped per year clearly stand to benefit in a number of ways. First of all, more devices shipped means more chips shipped. Secondly, as these devices become increasingly complex, the value of the chips that go into those devices could rise as well.
The mobile revolution has also created opportunities for companies that aren't even involved in selling either the phones themselves or components directly into phones. These mobile devices generate lots of content such as increasingly high-resolution photos and videos. This content creates demand for cloud storage, which means that somebody needs to buy lots of storage space, as users often generate too much content to store locally on their devices (although the amount that can be stored locally continues to increase, too).
Also, as the data transfer rates of these mobile devices increase, particularly over cellular connections, the networking infrastructure required to support them needs to become more robust. This situation not only potentially leads to the sale of more infrastructure-related equipment, but also as capabilities of that equipment grows, so, too, could the dollar value per piece of equipment.
A few cheap, high-quality companies set to benefit from this one megatrend
Perhaps the craziest part about the mobile revolution and its impact is that this is just one trend that's had an impact on many companies. There are many companies that benefit from these trends. Although not all of them will ultimately turn out to be winners, here are some of the companies that I follow that are not only reasonably valued but also seem to have good growth prospects.
Qualcomm (NASDAQ: QCOM) is company that benefits from the mobile revolution through the sale of chips into phones and tablets. It also holds a number of key wireless patents that allow it to get a pretty sweet royalty check for every 3G- and 4G-capable device sold. Its growth prospects are solid, and at just over 14 times trailing-12-month earnings (it's even cheaper once one backs out its massive cash pile), it's a good example of solid growth and value in tech.
Another company that seems to be very well positioned in tech, and which trades at a modest valuation, is Micron (NASDAQ: MU). The company builds DRAM and NAND flash, both of which are critical to computing today and should continue to be for the foreseeable future. It also trades at just 7.7 times this year's expected earnings.
Last, but not least, is Broadcom (NASDAQ: BRCM), which sells connectivity chips into mobile devices and is a leading provider of chips that go into networking equipment. It trades at just over 15 times this year's expected earnings and looks poised to benefit from the mobile-device megatrend.
These are just three companies from the niche within technology that I actively follow, and there are plenty more. I believe that as long as you can identify a major megatrend (a popular one these days is the Internet of Things) and then do the work to try to identify high-quality companies that stand to benefit from that trend, you can probably generate solid long-term returns by investing in the right companies.