The technology sector is huge, and the number of technology stocks and subsections of the sector can be truly overwhelming. So, to help investors drill down to the best stocks, we're going to look at four key angles you can take to help you get started in this massive sector.
This article won't tell you how to dig into the nitty-gritty details of a company's annual report, but it will help you understand which types of tech stocks you should be looking for, and offer you a good example from each category.
If you're in need of a solid angle for investing in the tech sector, read on.
Play it safe
New tech companies seem to emerge every other day, and the promise of following new technologies and trends can be very enticing. But sometimes, a stable tech stock is the best approach.
Apple (NASDAQ:AAPL) is one of the most dominant tech companies on the planet, and despite its huge market cap and decades of making devices, the company still manages to produce big gains for investors.
Apple's stock is up nearly 68% over the past year, it just released its first smartwatch, it sold a record-breaking number of iPhones in its most recent quarter, and it continues to outpace the PC industry with its Mac sales. Clearly, the company still knows how to lead the sector and make investors very happy at the same time.
On top of that, Apple's cash and investment reserves are now bigger than ever -- reaching $178 billion at the end of 2014. Having all of that money on hand allows the company to invest in new technologies, while being protected from tech booms and busts. And if that weren't enough, Apple trades at just 17 times earnings (lower than the industry average of 23), making it a relatively inexpensive buy for investors.
Look for a great dividend
Of course, not all tech investors are looking for the same thing. If you want a company that will pay you back while it grows, then adding a dividend tech stock to your portfolio may be the right approach for you. The key is to find a high-yield stock with consistent payouts, and one that will continue paying over the long term.
For investors looking to go this route, IBM (NYSE:IBM) has been one of the most consistent dividend payers, with a solid track record for paying its investors.
IBM has long been touted as a strong dividend play, but recent turbulent times for the stock have spooked some investors, pushing the stock down 17% over the past 12 months. Yet its dividend remains intact, and the company trades at less than 14 times earnings.
The company's slowly been bumping its dividend payout since the mid-1990s, which has led to its current quarterly payout of $1.10 per share. As far as dividend tech stocks go, investors would be wise to remember this old tech stalwart.
Choose a fast-growing leader
Admittedly, finding these will be a bit trickier, but the concept is still very straightforward. For this angle, you're looking for a company that is already ahead of the pack in a particular subsection of technology -- and is doing everything it can to stay there.
For this one, let's take a look at Ambarella (NASDAQ:AMBA). The company makes systems-on-a-chip (SoC) for low-power, high-definition video compression and processing. Simply put, this company's SoC helps GoPro's cameras shoot fantastic footage.
Ambarella is a leader in the space, and even though it makes a lot of its revenue from GoPro, its tech is also used in filmmaking drones, security cameras, and Xiaomi's action cameras. The company needs to protect its niche in wearable tech compression, and so far, that hasn't been a problem.
The stock's not all that cheap, trading at 48 times earnings, but it's grown 176% over the past 12 months and is on track to continue dominating the wearable tech space. Because of the company's dominant technology, companies like Xiaomi and GoPro can compete against each other while Ambarella benefits from both companies' sales.
Find a company positioning itself for the next big thing
This can be the hardest of angles to take, but it doesn't have to be. We're not looking for blind, reckless stock picks, here, but rather ones that are betting on new tech waves and have the means to follow through.
So, for this angle, let's consider Skyworks Solutions (NASDAQ:SWKS). The company may best be known for its mixed analog signal technology found in Apple and Samsung mobile devices, but Skyworks is moving into a newer area of tech, called the Internet of Things (IoT), as well. The IoT allows devices to collect and analyze data, as well as automate processes on their own. If you need a primer on the IoT, check out this article.
Skyworks' Internet of Things potential hasn't been fully realized yet, and that's why I like the company. Skyworks' stock has has spiked 185% over the past 12 months on its mobile technology pursuits, leaving its IoT growth virtually untapped. Skyworks is currently putting its wireless IoT tech in some of General Electric's healthcare equipment, and last year, it partnered with Panasonic to create wireless filters to efficiently connect IoT devices to wireless spectrum bands.
The company's CEO, David Aldrich, expects the Internet of Things to be one of Skyworks' key revenue drivers over the next year. He said on a recent earnings call that the company is looking into automotive, connected homes, and wearable tech for new growth, and it could possibly license existing Skyworks technology for IoT use.
One more thing
Clearly, these categories are just a jumping-off point for investors. But each angle provides a clear way for you to decide whether a tech stock matches up with your investing interests.
If there's one key ingredient all tech stocks need to have in common, though, it's the ability to innovate. That's why I chose the companies listed above, because each one has proven that they know how to pursue new ways of making great tech. And if you can find a company that's great at outpacing the competition, then you're well on your way to picking a great tech stock.
Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Ambarella, Apple, and GoPro. The Motley Fool owns shares of Ambarella, Apple, General Electric Company, International Business Machines, and Skyworks Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.