The road to wealth is paved by tech – but only if you follow five key rules.
In my last column, I unveiled the first of those five … and promised the second rule would follow shortly.
Today, I’m keeping that promise, and am going to tell you all about Rule No. 2.
Better still, let me start by telling you a story that shows you how this rule works – and how much money you can make by using it …
Late last spring, the “experts” were telling anyone who would listen to avoid eBay Inc. (NasdaqGS: EBAY) at all costs.
CNBC, MSNBC, all the “best” financial Websites … no matter where I looked the message was the same: The company’s best days were behind it, its numbers were eroding, and there was nothing the experts could see that would change the auction site’s flagging fortunes.
But I knew differently.
You see, Wall Street is like a big club – a club that nurtures like-minded thinking and discourages dissenting viewpoints. Because it’s so big, and so influential, its views are the ones you read in the mainstream business press.
If you really want to get wealthy, you need to think for yourself.
And that’s just what I did.
I knew that the “experts” had totally blown it when they looked at eBay.
They missed an ongoing turnaround in the company’s main business. They missed the impact that some strategy acquisitions were going to have. They missed the shrewd foray eBay was making into the digital-payments realm – a sector that offered the company an explosive profit opportunity.
The upshot: The experts missed the fact that eBay’s shares were about to soar.
I didn’t keep this to myself. In fact, I told Money Map Press subscribers “two years from now, you’ll wish you’d bought this stock.”
I was right. Ten months after I made that call, the company’s stock is up 40%. That’s double the return of the “record-setting” Standard & Poor’s 500.
Best of all: That 40% profit is just the start.
eBay is suddenly an “in” company on Wall Street, and analysts are extolling the “turnaround” being engineered by the team of CEO John J. Donahoe. Analysts are saying that eBay’s shares, now at $57, could go as high as $70, for a return of 20%.
But at that level, our subscribers would pocket a 70% gain – because I was able to tell them to buy at $41.
And I was able to make this call because I followed the second of my five rules … the tech-investing blueprint that lets me find the best stocks before they soar into the stratosphere.
Tech-Wealth System Rule No. 2: Separate the Signals From “The Noise”
You can see why I warn investors to ignore “The Noise.” It’s the Siren Song that will lead you down the path to investment destruction. And most retail investors end up succumbing … which is precisely what Wall Street wants to see happen.
But the Noise is hard to ignore. I mean, it’s everywhere. It’s the latest “Buy” ratings from Goldman Sachs or some other investment bank. Or it is CNBC Mad Money host Jim Cramer yelling into the camera, firing off opinions like a turbocharged Gatling gun.
IPOs are another place where you can find a lot of hype. The investment bankers want to make every new issue sound like it’s the Next Big Thing in Tech.
How’s that Facebook IPO working out? It’s off 28% in a year. Groupon is a 56% loser – a train wreck that recently cost the CEO his job (and deservedly so).
Disasters like these give tech investing a bad name… bad enough, in fact, to keep many individual investors at bay.
Don’t make that mistake. The tech sector is one of the greatest creators of new wealth in history – and will be for decades to come.
You just have to know where to look … and how to find the winners.
That’s why it’s so critical that you do what I do – ignore the Noise and focus instead on the Signals that potential winners send out… before they begin their explosive surges.
These Signals are the fundamentals you should be looking at, thinking about and studying on a daily basis.
Even here the “experts” will attempt to dazzle you with their brilliance – and baffle you at the same time – by citing a laundry list of fundamental ratios, indicators and signals.
This is just more Noise. Ignore it.
The reality is that there are three signals that will let you separate the prospects from the suspects on any list of tech stocks you might be looking at. And they are:
- Profit Margins (often shortened to “margins” in investor parlance).
- Return on Equity (ROE).
- And Return on Assets (ROA).
Let’s take a look at each of these three “quick-check” signals. And let’s start with profit margins – what your boss or your accountant might refer to as the “bottom line.”
Profit Margins are just that – what’s left over after the company pays all its expenses, and all its taxes. Over the past 30 years, profit margins for U.S. firms have averaged 7%. Higher is always better, but we’d like to see a firm at least hit that benchmark.
It’s also vital to look at “Operating Margins.” This excludes such items as amortization and tells us how well a high-tech growth firm controls costs as it expands operations. The number here is simple – operating margins should be higher than those for net profits.
Return on Equity – the second of our three signals – shows us how good a job the CEO is doing for the company’s shareholders. For most of the 20th century, the average ROE for U.S. stocks was 10%. Except for special situations, we want a stock that at least matches that number. Again, higher is better.
The third, and last, of our quick-check signals is Return on Assets. This tells us how good the company is at investing in factories and the equipment that goes inside them.
We’d like to see a minimum ROA of 5%. Anything less means the firm is spending too much of our money on gear that generates little in the way of additional returns.
Now let’s look at a company that has all three of these covered – InterDigital Inc. (NasdaqGS: IDCC).
You’ve heard me say in the past that the Mobile Wave is a red-hot sector. Well, InterDigital is a mid-cap leader in mobile technology. And leaders are what we look for.
IDCC not only has great technology … it also has a patent portfolio that most of its rivals would kill to own. That’s because these patents are like a gator-infested moat that protects IDCC’s business by serving as a “barrier to entry” for any would-be rivals.
And our quick-check signals confirm this view. It has a profit margin of about 41%, and an operating return of 65% – both well above our thresholds.
It checks out fine with our other two signals, as well: its ROA is 26%, and its ROE is better than 50%.
Clearly, this is a potential tech-market wealth-builder that we’d want to look at. Ironically, not long ago it was the victim of market noise itself. The stock started selling off sharply in 2011 and the carnage continued for months.
Even now some of the experts continue to dismiss this stock – just as they did with eBay a year ago. They’re predicting an average price of $40 a share for IDCC – even though it’s trading 8% higher than that right now.
Oh, and it’s up 20% during the past six months.
So, once again, it paid to ignore “The Noise” and follow the signals. Because those signals tell us that InterDigital is a quality company in a high-growth venue in tech.
In my next column, I’ll tell you all about Rule No. 3 on my list of Five High-Tech Wealth Creators. It’s a rule I learned long ago from an insider whose name you might recognize.
You won’t want to miss it…