“Dear Michael: I subscribe to your Strategic Tech Investor newsletter, and am a big believer in your message that investing in technology stocks is the single-best way to build up my savings and secure my future. And I want to do this – very much, in fact. But I don’t have a lot of money to get started. Can you help me?”
Hearing from you folks – and knowing that this Strategic Tech Investor project is making a difference – is an incredibly gratifying part of my work here at Money Map Press.
Each week, I get dozens of comments, suggestions and encouraging testimonials.
I also get loads of questions.
But there’s one specific question I receive that dwarfs all others in terms of its frequency, and that affects me more profoundly.
It’s the question that starts today’s column.
And today I’m going to give you the most-complete answer possible.
Indeed, I’m going to show you a strategy that will allow you to invest in the top tech companies – and invest in the key explosive growth trends – that we talk about here each week.
If you commit to this plan, and follow it diligently, years from now you’ll look back on Oct. 1, 2013 as the day that changed your life …
Another Nice Mess
When I read the news bulletins coming out of Washington – including the one late yesterday about the debt-ceiling impasse – it always brings to mind that Laurel and Hardy catch-phrase: “Well, here’s another nice mess you’ve gotten me into.”
But I’m not laughing, and I know you aren’t either.
Since I got involved in the markets during the severe recession that hit us at the start of the 1980s, I’ve never lost sight of a key lesson: You can’t lose sight of your long-term financial goals.
The global economy and Washington are going to keep throwing curveballs. And “disturbing” events occur all the time. But you can’t let this “noise” divert you from those goals, which is why you need a long-term strategy that is customized to fit your needs, and that you know will get you where you need to go.
(In fact, this realization is the basis for the second of my Five Rules for Creating Tech-Investing Wealth: “Separate the Signal From the Noise.”)
And this strategy will get you where you need to go.
For most of this year, we’ve talked about such wealth-creating trends as the Mobile Wave, Big Data, the Internet of Everything, Cloud Computing, and the emergence of Biotechnology.
And I’ve showed you some explosive-profit opportunities being created by such intriguing “special situations” as mergers and acquisitions, corporate spin-offs, rising dividend payouts and the explosion in Initial Public Offerings (IPOs).
To create this “foundational” tech-investing plan for you, I obviously wanted to identify areas that offer big profit potential. But I don’t want you to have to trade in and out of investments in pursuit of those profits, since that defeats the purpose of what we’re trying to do.
I wanted to identify areas where I’m projecting sustainable profit opportunities, meaning you can start out small – with almost any amount of money, in fact – and then just keep adding whenever you have a little extra money to do so.
The three areas that offer the wealth-igniting mix of big profits and explosive, sustainable growth are:
- And IPOs.
Having identified those three areas, I turned my attention to finding the best possible investment vehicles in each one. I obviously wanted to find investments that were strong performers, and I really wanted to make sure they gave you access to the fastest-growing, most-innovative, and highest-potential investments each of these three realms.
- The SPDR S&P Software & Services Fund (NYSE: XSW).
- The First Trust NYSE Arca Biotechnology Index (NYSE: FBT).
- And the First Trust IPOX-100 Index (NYSE: FPX).
Exchange-traded funds, or ETFs, are sometimes dismissed by veteran investors, or investors who prefer the “more-connected” feeling they get from individual stocks.
But even for those folks, ETFs offer some alluring features as a foundational element of a portfolio.
And for investors who are looking to get established, the simplicity and ease-of-investing that ETFs offer just can’t be beat.
Indeed, if you really break these down and study them – as we’re going to do right now – I think you’ll be staggered when you understand the opportunity these three funds are putting right into your hands.
Just one ETF in your portfolio can allow you to own 100 great technology shares for as little as $40. It also allows you to target proven winners in red-hot sectors like Cloud Computing, Big Data and Biotech without spreading yourself too thin.
So let’s take a look at these three funds – and get you started down that road to wealth…
High Tech ETF No. 1: SPDR S&P Software & Services (NYSE: XSW) – Recent Price: $85
When it comes to notching stratospheric profit margins, almost nothing beats the software sector. That’s because software firms don’t have to build the billion-dollar fabs that chipmakers need, or build or license the big assembly plants that PC-makers require.
These firms also often use a licensing model to generate revenue. By that I mean, software companies like Microsoft Corp. (Nasdaq: MSFT) and Oracle Inc. (NYSE: ORCL) basically “rent” seat licenses to corporate customers – and collect a fee based on how many folks actually use their product.
That’s where the XSW ETF comes in.
With more than 160 stocks in its portfolio, this fund invests in the top software players. But it also gets you into such closely allied, high-growth areas as e-commerce, social-networking, data processing, Internet software, Cloud computing, Big Data and information-technology-consulting and services.
As such, XSW holds everything from low-priced small caps involved in computer gaming to the ultimate big-cap software-Internet firm Google Inc. (NasdaqGS: GOOG).
The strategy works: The fund consistently outruns the broader market. Over the past year, XSW has returned 31% to its shareholders. That’s 72% better than the 18% gain notched by the Standard & Poor’s 500 Index over the same stretch.
Besides Google, XSF also holds:
- Splunk Inc. (NasdaqGS: SPLK), a play on the hot trend of Big Data and is focused on that generated by “machines.” That’s a loose term that covers the Web, servers, networks, mobile devices and the billions of sensors in use around the world. With a market cap of $6.5 billion, the company has weak profits margins but is growing quickly.
- Cadence Design (NasdaqGS: CDNS), a leader in providing software and other services that help chipmakers design and test the quality of their products. With a market cap of $3.8 billion, Cadence has a profit margin of 32% and a return on stockholders’ equity (ROE) of 59%.
- And Web.com Group Inc. (NasdaqGS: WWWW), a company whose name describes its mission. It provides businesses with Web design, e-commerce capabilities and online marketing. With a market cap of $1.5 billion, the stock is up 110% year to date.
High Tech ETF No. 2: First Trust NYSE Arca Biotechnology Index (NYSE: FBT) – Recent Price: $65
This ETF gives us exposure to a broad array of new medical compounds at the cutting edge of science as well as established drugs with solid cash flow (CF).
FBT holds 20 stocks in its portfolio – each about 5% of the total portfolio. By offsetting the large-cap holdings with some smaller picks, the median market valuation of this ETF’s holdings has been cranked down to about $6.3 billion – low enough to offer a very nice upside.
Over the past year, FBT has gained about 40% versus nearly 18% for the S&P 500. But it has crushed the market over the past five years with returns of 160% – nearly six times the overall market return of roughly 28%.
FBT’s holdings read like a Who’s Who of biotech leaders. They include:
- Amgen Inc. (NasdaqGS: AMGN), which sells medicines to treat cancers, kidney disease, rheumatoid arthritis and bone disease. With a market cap of $74 billion, the firm has a profit margin of 26% and an ROE of 24%.
- Celgene Corp. (NasdaqGS: CELG), which has products that regulate cells, genes and proteins to treat cancers of the bone marrow, breast and lungs. With a market cap of $49.6 billion, Celgene has both a profit margin and an ROE of roughly 25%.
- And Regeneron Pharmaceuticals Inc. (NasdaqGS: REGN), a firm that’s known chiefly for EYLEA, a compound that combats age-related macular degeneration, a leading cause of blindness among older folks. With a $24.4 billion market cap, the firm has a 53% profit margin and an 87% ROE.
We also get to tap into a wide range of clinical trials for new products. In fact, Celgene and Regeneron alone are together running nearly 50 trials for drugs designed to treat breast cancer, tumors, metabolic disorders and high cholesterol levels. And these trials are queuing up the sector’s next round of growth.
High Tech ETF No.3: The First Trust IPOX-100 Index (NYSE: FPX) – Recent Price: $41
FPX targets one of the most important forces driving the market to new heights – initial public offerings (IPOs), with tech firms playing a major role in the success of new issues.
A recent survey by the global consulting firm PwC shows that IPOs soared in this year’s second quarter, the last full period for which data is available. The April-to-June period saw 62 IPOs, an 88% increase from the same stretch a year ago.
And it wasn’t just the number of IPO deals that skyrocketed – so did the amount of money they raised. Second-quarter IPO deals generated $13.1 billion in proceeds, up 111% from the same period in 2012, PwC said. Those statistics take out the huge impact of Facebook Inc. (NasdaqGS: FB), which raised $16 billion when it went public in May 2012.
Now, this ETF doesn’t focus exclusively on tech: About a third of its holdings are in tech and the closely allied field of healthcare – meaning the fund mirrors the market for new stock offerings.
Besides tech, the roughly 100 stocks that FPX holds include positions in finance, autos, retail, heavy industry, energy and a smattering of metals covering nearly 100 stocks.
Over the past year, the fund has returned more than 44% to investors. FPX is weighted toward more stable mid-caps with an average valuation of roughly $3.3 billion. Besides Facebook, it holds:
- Tesla Motors Inc. (NasdaqGS: TSLA), maker of sleek, electric-powered cars that have redefined the auto market in a way that’s forcing the Big Boys to respond. With a market cap of $23 billion, Tesla trades at an eye-popping 102 times forward earnings, but has a negative return on assets and equity.
- NXP Semiconductors NV (NasdaqGS: NXPI), which specializes in a technology-standard-setting type of mobile-commerce semiconductor known as a near-field communications (NFC) chip. With a market cap of $9.3 billion, this stock trades at just 9.5 times forward earnings and a 12.5% (ROE).
- AbbVie Inc. (NYSE: ABBV), a spin-off from drug giant Abbot Laboratories (NYSE: ABT), offers treatments for arthritis and advanced prostate cancer. With a market cap of $31.4 billion, AbbVie has a 27% profit margin and a 63% return on stockholders’ equity.
Clearly, these three funds give you access to some of the hottest trends and most-fascinating profit opportunities on earth.
Over time, you will be surprised at how a successful investment plan and a visible increase in your net worth will give you the confidence to “win” in other parts of your life – and just make you feel better and more secure over all.
Once you’ve established your holdings in these, you can jump off and invest in some high-quality individual stocks.
And, hey, as cliché as it sounds, with a financial foundation like that, you really may look back on today as the one that transformed your life.
If that does happen, believe me when I tell you that no one will be happier for you than me.
[Editor’s Note: As I hope today’s Strategic Tech Investor underscores, I welcome your comments – and your questions. And I read everything that you send me. My boss likes to see the comments, too. So if you like this service and feel it’s useful, take a few minutes to post a comment here and let us know. One other note: While today’s column was focused on ETFs, we haven’t given up on individual stocks. In fact, I’m working on some research right now that I hope to roll out for you folks in the next few columns. So please keep stopping by.]