Invest Like a CEO – and Beat the Market by 40%

3 | By Michael A. Robinson

If you’ve ever seen the movie All the President’s Men, then you know that maxim of investigative journalism – “Follow the money.”

The same idea applies to investing, of course, and today we’re going to follow the money CEOs plan to spend over the next half-decade – and then use that knowledge make some cash ourselves.

According to a survey I just read, our nation’s top executives plan to spend a lot of money on technology that will help them attract, retain and understand customers.

That may sound, at first, somewhat vague. After all, there is no “retaining customers” tech sector.

But after digging into the survey – doing a little “investigative investing” – I figured out exactly where those CEOs will be spending their dollars in the next five years.

And today I’ll show you an investment that takes advantage of these long-term spending trends in a way that beats the market by 40%…

Follow the Leaders

Like I hinted at above, the categories that forecasting firm Gartner outlined in its recent survey reveal more about the way CEOs categorize their spending than the way in which investors like us look at tech stocks.

For instance, “digital marketing” topped the survey, with 38% of CEOs listing it as one their top five areas of tech spending over the next five years.

But for tech investors like you, digital marketing is a wide field. It includes everything from advertising on smartphones and tablets to data embedded in apps to online campaigns to Web video and new-generation digital billboards.

In other words, spending on digital marketing means CEOs are assuming more and more sales of mobile devices, which will, in turn, lead to increased production of semiconductors, flash memory, sensors, apps, LED lights and much more.

“E-commerce” ranked second in Gartner’s survey, with 34% of responding CEOs listing it as one of their top objectives.

That means CEOs forecast a continued boom in online sales, which covers everything from business-to-business marketing and travel to logistics and online retail.

Cloud computing and Big Data also top the list of CEO tech priorities, coming in at fifth and sixth place, respectively. And 23% of respondents said they expect to invest heavily in making their employees more mobile.

These last three categories alone cover a wide range of tech platforms, including cybersecurity, computer servers, optical networking components, high-performance computers and software with advanced algorithms.

Earlier this month, based on the U.S. economy’s recent performance, I projected a 7% gain for the Standard & Poor’s 500 Index. And I said tech will do much better than that.

To me, the CEOs’ survey responses are just more evidence that the entire technology industry is in great shape – and should do very well in 2015.

Following that CEO spending, here’s how you can profit…

The Big Names

I think you should take a good look at the Technology Select Sector SPDR Fund (NYSE Arca: XLK).

This is an exchange-traded fund (ETF) that covers a wide swath of technology, mostly focused on U.S. leaders.

With more than 70 stocks in its portfolio, XLK offers investors the chance to specialize in high tech while at the same time diversifying across multiple sectors, including Internet services and software, information technology consulting, semiconductors, computers, peripherals, wireless services and cybersecurity.

It holds several mega-cap firms, like Intel Corp. (Nasdaq: INTC). Intel is a play on the booming U.S. semiconductor industry and, at 3.74%, is one of XLK’s top holdings.

About 4.1% of the fund is invested in social networking and mobile ad leader Facebook Inc. (Nasdaq: FB), and XLK also holds online media company Yahoo Inc. (Nasdaq: YHOO), which counts 800 million users.

Plus, you also get to profit from XLK’s largest holding Apple Inc. (Nasdaq: AAPL), at 16.3%, and its many state-of-the-art consumer products. About 9.5% of XLK is dedicated to Microsoft Corp. (Nasdaq: MSFT), which is benefiting from PC software, mobile, online search and computer gaming.

Beyond the Stars

The ETF also boasts a robust list of smaller, highly successful tech leaders with excellent financials. Take a look:

  • Qualcomm, Inc. (Nasdaq: QCOM) is a leader in wireless communications technology. The San Diego-based firm is known for its Snapdragon smartphone processor. Snapdragon is a study in miniaturization – it condenses multiple functions into a normal-sized chipset. Qualcomm also has products for the automotive, healthcare and networking markets. It has a market cap of $125.8 billion, 30% operating margins and a return on equity of 20%.
  • Adobe Systems Inc. (Nasdaq: ADBE) is one of the top software firms in the world and has a strong Internet presence. The company is known for Photoshop photo editing software and the now standard PDF file format. The San Jose, Calif.-based firm recently stepped up its cloud offerings and is booking a lot of sales with its Creative Cloud software suite. In its fourth fiscal quarter, Adobe beat on earnings as its cloud sales grew 20% above forecasts. The company has a $37 billion market cap, 10% operating margins and a 4% return on equity.
  • Cognizant Technology Solutions Corp. (Nasdaq: CTSH) specializes in information technology and consulting services. It’s a broad tech play in its own right. The Teaneck, N.J.-based company has key partnerships with top tech companies like Adobe and networking/Internet of Everything leader Cisco Systems Inc. (Nasdaq: CSCO). With a market cap of $32.8 billion, Cognizant has operating margins of 19% and earns 22% on stockholders equity.
  • Avago Technologies Ltd. (Nasdaq: AVGO) is a Singapore-based semiconductor firm focused on two key growth sectors. It makes fast, complex integrated circuits that speed up data centers used for cloud computing. It’s also a key supplier for Apple’s iPhone 6. With a $25 billion market cap, Avago has 20% operating margins and a 10% return on equity.
  • SanDisk Corp. (Nasdaq: SNDK) is a top supplier of flash memory products. Nearly every major mobile phone manufacturer relies on SanDisk’s flash memory products in one way or another. Moreover, the company’s memory devices also are used in data centers, which gives the firm a direct tie to the burgeoning cloud and Big Data sectors. SanDisk has a market cap of $22 billion, 27% operating margins and a 17% return on equity.

Trading at $42.30, XLK offers a cost-effective way to invest in several key tech sectors all at once.

In the past year, XLK has gained 19%. That beats the S&P 500’s 13.4% return over the same period by 41%.

We also get a dividend, with an annual payout ratio of nearly 1.7%. In other words, this ETF gives us income as well as appreciation.

As you can see, when we follow the money, we find great foundational plays.

XLK is the kind of investment you’ll want to hold for many years to come.

And it’s one you want to buy on the dips, turning market downturns to your long-term financial advantage.

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