When trees start falling, it’s a good bet that stock prices are headed higher – especially in the tech sector.
Before you start worrying that I’ve taken leave of my senses, let me assure you that there is a method to my apparent madness.
And the ultimate objective of this exercise is to put money in your pocket – first by predicting where the U.S. economy and the American tech sector are heading in the final few months of the year … and then by pointing to the specific investments that I believe are destined to crush the broader market returns.
I know that’s a pretty ambitious set of goals, so we’d better get started.
And I’m going to begin by telling you a story that will show you one of the most bullish “Buy” signals I’ve seen in a long time.
Indeed, once you understand this signal, you’ll see why I believe the final 109 days of this year will be some of the most profitable tech investors will see …
A Window Into Silicon Valley
Working out here near Silicon Valley, I spend a lot of time on the phone with colleagues back East who look to me as a “window” into the vibrant U.S. tech sector.
And because I’ve been out here for roughly 30 years, I can understand why they view me that way. Silicon Valley – and California, in general, in fact – is very different than what folks find on the East Coast. It takes time to learn the language out here, and to understand the often-subtle signals that are like an “early warning system” for tech-market moves – and windfall profits.
And the latest signal – the one that has me so jazzed right now – was one that I found … quite literally … in my own backyard.
Two weeks ago, I looked out my back window … and realized that something was missing.
The whole time we’ve lived here, that view out the back included a towering eucalyptus tree; I mean, that baby was 120 feet tall. It was mostly on my side of the line that separates my lot from that of Steve, my neighbor. And that tree didn’t pose any kind of imminent danger.
But Steve wanted to take the tree down to improve his view of the nearby Oakland hills.
And he was willing to spend thousands to do so.
Steve and I had talked about this before. I gave him my blessing. And on that afternoon two weeks ago, I peered through the window and found that Steve had made good on his promise.
He’s not finished, either. Steve’s already planning to have the same tree-cutting crew come back to take out some additional trees.
In other words, my neighbor is willing to spend thousands of dollars – just to improve his view.
Now that’s what I call “discretionary spending.”
And it says a lot about how confident Steve is in the outlook for the U.S. economy – and how secure he feels in his job.
For investors, that’s relevant for a very simple reason…
Five years after the nation’s financial crisis, people are starting to feel much better about the economy. They’re not just trimming trees – they’re also spending more on homes, cars and high-tech products.
My “tree-trimming” indicator is sending a very clear message.
But it’s not the only bullish indicator that I see.
In fact, if we’re going to talk indicators, I can boil it all down to you by looking at two key catalysts: small businesses and the U.S. new car market.
And each bodes very well for the rest of this year.
Small businesses account for more than half of all new jobs created in this country each year. And the leaders of those enterprises are about as optimistic today as they have been in at least five years.
A recent Wall Street Journalstory showed the “confidence index” among small-firm CEOs reached a high of 104.2 in August.
That was up from 102.2 in July of this year and compared very favorably to the 93.7 level reached in August 2012. Of the 678 business owners who were surveyed, 73% predicted sales will increase in the next year.
And 54% expect profitability to improve.
Other surveys matched The Journal‘s findings.
The quarterly small-business optimism index from Wells Fargo and Gallup found the highest level of enthusiasm since the third quarter of 2008. And the National Federation of Independent Business, a leading trade group, said its August sentiment poll had its fourth-highest reading since December 2007.
Clearly, small business owners feel that they are on a roll. That’s great for tech investors because many of these small companies are tech-related: They either supply technology products or they need to invest in technology in order to boost productivity and overall productivity.
Pedal to the Metal
Small business owners aren’t alone in their optimism. Consumers are also feeling expansive.
That means they are buying new cars and trucks in droves.
This, too, is very important for the tech ecosystem.
You see, U.S. auto production is more dependent than ever on high-tech platforms – including PCs, tablet computers, microchips, robots, computer networks and software.
Last month, the industry sold about 1.5 million new vehicles, up 17% from a year ago. Nearly all major automakers reported double-digit sales gains.
August sales translated to an annualized rate of 16.09 million cars and trucks. That’s on pace to beat the pre-recession high-water mark of about 16 million units that was reached back in December 2007.
We’re not talking about Model T’s here: Today’s vehicles are rolling technology platforms. And remember, modern cars and trucks come equipped with some pretty sophisticated technology. For instance, they contain a passel of semiconductors, and rely on a bevy of on-board sensors.
Today’s cars and trucks can easily have dozens of these devices. They measure things like tire pressure, engine heat, oxygen flow, emissions, fuel level, vehicle impact for air bag deployment as well as GPS positioning.
So, we have some very solid reasons to believe that tech shares will continue to surge – at least through the end of this year.
And since we know that, we can identify several tech-related trends that offer some hefty profit opportunities we can capitalize on – immediately.
We’re going to focus on three: IPOs, spin-offs and biotechnology.
Three Big Profit Trends
Stock Offerings Stay Hot: With the bull market still going strong, we’ve seen a lot of initial-public stock offerings (IPOs) this year – especially for high-tech and bioscience companies. A recent survey by the global consulting firm PwC shows that IPOs soared in this year’s second quarter.
The April to June period saw 62 IPOs, an 88% increase from the year-ago period. Those new second-quarter stocks raised a total of $13.1 billion, up 111%from the same period in 2012, PwC said.
The First Trust IPOX-100 Index Fund (NYSE: FPX) is an exchange-traded fund (ETF) that’s a great way to play this market. FPX has returned nearly 39% over the past year, more than double the overall market gain of 16.8% gains.
Cash in When Companies Cash Out: They’re called “spin-offs,” and they occur when a publicly traded company believes it has a business unit that the market has undervalued. The solution is to spin off that division as a separate publicly traded company. With the public anxious to snap up new issues, I expect this segment to remain strong.
A study by Lehman Bros. found that spin-offs typically outperform the market in their first two years by as much as 40%. A Penn State study of 174 spinoffs found that – in their first three years – these newly independent companies showed price appreciations of 76%, beating the Standard & Poor’s 500 Index by 31%.
The Guggenheim Spin-Off Fund (NYSE: CSD) is an ETF focused on this trend and generally invests in stocks with market caps of no more than $10 billion. Mirroring the Beacon Spin-off Index, CSD holds 24 stocks. Over the past year, CSD has returned 47.6% to shareholders, a 180% improvement over the S&P 500.
Lively Gains From Life Sciences: This biotech sector continues to beat the broader market – because of three factors. First, biotech stocks often perform well in the hot IPO climates – which we certainly have right now. Second, because of the so-called “Patent Cliff” – where billions of dollars’ worth of blockbuster drugs are losing their legal protections – Big Pharma players are restocking their pipelines by purchasing smaller players, a fact that’s lifted biotech stocks across the board. Finally, the industry continues to do well with new products and clinical trials.
The iShares NASDAQ Biotechnology Index (NASDAQ: IBB) is an ETF that covers the entire industry.
IBB invests nearly 58% of its cash in big-cap firms that have successful products on the market. The remainder of its portfolio includes mid-cap, small-cap and even very-early-stage companies. Over the past year, IBB has returned 44% to investors – more than double the gains of the overall market.
As you can see, each of these ETFs are special investments because they focus on very exciting opportunities, and can deliver market-smashing returns. At the same, however, their broader holdings can diffuse the risk a bit, meaning you can hold them for the long haul, too.
I get a lot of questions from many new investors who are excited to be getting started, but who also concede that they need to invest a little bit at a time.
These ETFs are perfect investment vehicles for those of you in this category.
And that means you can use these as “foundational” investments – on which you can build your financial future.
Have a great weekend.
[Editor’s Note: I really like hearing from you. Don’t be afraid to post your comments below – to ask questions, make suggestions or report on profits you’ve made from our recommendations. Or drop me a note just to check in. After all … you’re the reason I’m here.]