In my recent columns, I laid out the first three rules for building wealth through what history has shown to be the most lucrative field of investing — high tech.
Today, I want to talk to you about the Holy Grail of investing.
It’s the one thing that elevates the tech sector far above any other profit opportunity you can think of. It’s also the one thing that will let you take your average household net worth of $25,000 and turn it into $250,000, $500,000 or more.
I’m talking, of course, about growth.
If you’re looking to create life-changing wealth – to get rich – then you have to find investments that can deliver superior growth on a consistent basis… like clockwork.
Let me show you what I mean.
Most of you have probably never heard of Abaxis Inc. (NasdaqGS: ABAX), a Union City, Calif.-based maker of portable blood screeners.
But I have.
And I can tell you some very intriguing insights about these folks.
I can tell you, for instance, that the company’s flagship product is in high demand because it can screen for several diseases at once. It delivers test results in a matter of minutes. And it requires very little training to use.
Last quarter, Abaxis grew its sales by 38% and its profits by almost twice that much.
And going forward, I’m expecting to see the company’s profits advance at an average annual pace of 15% for the next 5 years.
Product-focused innovation like this translates into substantive growth – and meaningful wealth. Indeed, $25,000 invested in Abaxis 10 years ago, would be worth $311,250 today.
That’s a return of 1,145%.
If you want to supercharge your investment portfolio – and perhaps even get rich – the fourth of my five investing strategies is one that you just can’t ignore.
Tech-Wealth System Rule No. 4: Focus on Growth
To drive this point home, I’m going to share a bit of wisdom that most investors – including Wall Street institutions – just don’t get.
You’ve probably been reading a lot lately about some of the high-tech heavyweights and the huge cash hoards they’ve amassed. If you include cash and both short- and long-term investments Apple, Microsoft, and Cisco Systems are right now sitting on about $137 billion, $78.8 billion and $47 billion, respectively.
That’s a heck of a lot of money. And the controversy, of course, is whether those companies should be able to keep all that cash on their balance sheets, or should pay it out to shareholders as hefty dividends.
But that’s the wrong question to be asking. The real question is: Why would I want to invest in these companies at all?
What happens, you see, is that highly profitable companies over time can amass big blocks of cash. For high-growth-seeking investors like you and me, however, that’s often a cautionary signal.
Chances are, those companies have either run out of ideas on how to use that cash to generate continued growth. Or their business has slowed so much that there’s just no place to profitably redeploy that cash.
In those situations, firms often boost their dividend payouts in a big way – effectively saying they believe you can make your money grow faster than they can.
If you’re looking to create meaningful wealth, why would you invest in a company that thinks like that?
After all, Silicon Valley has given birth to firms that have created more than $1 trillion in new shareholder wealth just since the middle 1980s. So there are plenty of high-growth alternatives.
All You Have To Do Is Look Around.
In a previous column I told you about a big winner in the hot new trend I call the Mobile Wave.
ARM Holdings (NasdaqGS: ARMH) has just crushed the market and has the stock returns to prove it. Over the past five years, it has given investors gains of nearly 650%, turning $25,000 into $187,500.
In my column about Rule No. 1, I cited ARM as a company that has great operations. But that’s only a part of the story.
The innovative chipmaker is also a growth machine.
Over the last three years, ARM has grown its sales at an average annual rate of about 24% and its earnings per share at 38%. Growth rates like that mean the company is doubling its top and bottom lines every three to four years.
And the company is projected to increase profits at an annual rate of 22% over the next three years. That’s why savvy investors are willing to pay 35 times earnings to own a piece of ARM. They understand the stock’s wealth-boosting payoff potential.
To put this firm’s high growth in context, let’s compare it to a former-leader-turned laggard.
I’m talking about Hewlett-Packard.
In its heyday, HP was the go-to firm for a wide range of tech products – from calculators to printers to branded PCs. From January 1980 to July 1997, the company’s stock advanced 1800% (from $1.80 a share to $34.44).
In recent years, HP’s luster has faded… as has the company’s growth rate. It missed the Mobile Wave and it isn’t positioned for the hot trends of Big Data and Cloud Computing.
Now, HP is just spinning its wheels…
Talk about dismal growth rates. Over the past three years the company’s revenue hasn’t advanced one bit and its earnings per share has actually fallen 2%.
Investors who bought this zombie firm paid dearly for their poor decision. Shares are down more than 55% percent over the past five years, meaning a $25,000 investment has been shaved to $11,250.
While we are focused on growth, we don’t way to buy growth at any price. We want to pay reasonable prices so we can really generate wealth.
There is a formula we follow.
That’s where my five-part tech-investing blueprint comes in. The entire objective of my strategy, developed from decades of experience, is to find these companies just before they start their surge – or at least soon after they start.
By that I mean we want to find companies that offer us excellent growth and safety of principal.
One way to achieve this objective is to sleuth out firms that have strong fundamentals – while continuing to invest in their future growth. Taking some of that balance-sheet cash we talked about and plowing it back into R&D results in new sales, higher profits and fatter shareholder returns.
That’s why I look for companies like ResMed Inc. (NYSE: RMD).
This mid-cap firm is a leader in medical devices for treating, diagnosing, and managing sleep-disordered breathing and other respiratory problems.
This is truly a growth field. Sleep-related breathing problems are as widespread as diabetes and asthma, affecting 20% of all U.S. adults.
With a market cap of $6.5 billion, ResMed recently boosted its quarterly profits by about 24%. It throws off $350 million in cash each year.
No wonder the stock is up more than 45% in the past year.
Meantime, ResMed also is doing a great job of paving the way for its continued success. The company invests about 7% of its sales in R&D in the five clinical areas that comprise the bulk of its sales. That’s about 15% higher than the medical device industry’s average R&D rate.
ResMed has about 50 clinical trials for new products under way that will lead to new profits, not to mention more gains for its investors.
This is a firm that truly understands that growth and shareholder wealth go hand-in-hand. R&D is such an integral part of ResMed’s operations it has set up a web page with an online video explaining its reinvestment strategy.
That’s why I expect the company to grow its earnings at a rate of 20% a year for at least the next three years…
These guys get it. They’re all about growth. They live by Rule No. 4.
And you should, too…
I’ll bring this all together when I tell you about the final rule on my list of Five High-Tech Wealth Creators.
You won’t want to miss this important conclusion…