Your Tech Wealth Blueprint
Five Rules for Finding the Best Tech Stocks – Before They Take Off
Dear Strategic Tech Investor Reader,
The road to wealth is paved by tech – but only if you follow this Tech Wealth Blueprint.
I’ve been analyzing and investing in technology stocks for more than 30 years now. And during that time I’ve developed a series of five Tech Wealth Rules.
They’ll help you become a much savvier, and far more profitable, tech investor.
I crafted them to help you identify the biggest market trends – and the companies best positioned to yield hefty profits.
And most importantly, they’ll make sure you avoid the most common tech pitfalls – like chasing a sexy sounding, but ultimately worthless initial public offering (IPO).
These strategies let you tap into the industry’s most exciting and fastest-moving opportunities so you can safely capture wealth – and have a better life now and in retirement.
So, let’s get right to them…
Tech Wealth Rule No. 1
Identify Companies With Great Operations
The first rule is a big one.
You see, it’s not enough to find an interesting company in a hot tech sector.
To score the kind of life-changing profits you desire, you have to invest in truly exemplary high-tech winners – the companies that are changing the rules in computers, biotechnology, industrial materials, telecommunications, aerospace and other cutting-edge sectors.
Those paradigm-changing ventures create markets where none existed, leapfrog existing technologies, and create products that their customers never even dreamed about – but then can’t live without.
Companies this innovative, this nimble and this explosive all share a common trait.
They all have great leadership.
Identifying such gifted leadership takes time. That’s why I’ve developed such a vast network of contacts and spend so much time rubbing shoulders with industry leaders – especially high-tech CEOs. This allows me to learn about their business plans, competitive strategies and bankable high-tech trends.
Think about it this way: The New England Patriots wouldn’t be the best team in the NFL without Bill Belichick at the helm – and Microsoft Corp. (Nasdaq: MSFT) would be floundering without Satya Nadella.
But great leaders don’t always come from where you’d expect.
Take Fermi Wang, CEO of video microchip developer Ambarella Inc. (Nasdaq: AMBA), for instance.
Wang served two years in the Taiwanese army after graduating college, and that’s where he says he learned the most important lesson in business – the necessity to lead by example.
Like most soldiers, Wang spent his fair share of time training in the rain and mud.
And there he noticed one superior in particular not just joining his subordinates in their exercises, but seemingly thriving while doing so.
“There were no dry clothes for him,” Wang told Investor’s Business Daily. “Even though he was a high-ranking officer, he stayed right there with us the whole time.”
Wang took that message to heart.
After his time in the Taiwanese army, he went on to start up Ambarella in 2004 with his colleague Les Kohn. Since then, the Santa Clara, Calif.-based company has become a leader in supplying specialized semiconductor chips for video-compression technology and digital cameras.
And it’s a member of our Million Dollar Tech Portfolio.
Besides leading by example – knowing the technology and putting in long hours – Wang prides himself on making big promises. And then he doles out the promotions and bonuses when employees work hard and solve problems.
Wang is a leader who knows how to build a thriving, profitable company around high-growth technology the right way – hard work and dedication to quality.
With my five Tech Wealth Rules in hand, you could have spotted Wang as a guy to watch. As a guy you could trust with your hard-earned money.
And you would have been richly rewarded.
Just look at Ambarella’s gains since its October 2012 IPO compared to the so-called titans of tech:
- Ambarella, 965.97%
- Apple Inc., 36.36%
- Google Inc., 51.46%
- Intel Corp., 49.28%
- Microsoft Corp., 44.52%
Fermi Wang may no longer be getting his boots muddy – but he’s making investors wealthy through brilliant tech leadership.
Tech Wealth Rule No. 2
Separate the Signals from the Noise
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.
On Oct. 30, 2013, more than 16 months ago, I predicted that shares of Apple Inc. (Nasdaq: AAPL) would soar to $1,000 per share ($142.85, post-split) by Labor Day 2016.
This was back when most analysts were bearish on Apple and doubtful of CEO Tim Cook’s potential.
However, because I was able to “Separate the signal from the noise,” I can now boast that my stock prediction is well on its way to coming true – since then, Apple is up 69% to nearly $130.
And check out Apple’s most recent quarterly earnings report.
The iDevice King reported the biggest quarterly profit ever for a public company – $18 billion in net income over the last three months of 2014. And CEO Cook says his company made a “staggering” number of iPhone sales during that time – 74.5 million.
In fiscal 2015′s first quarter, Apple’s earnings per share (EPS) soared some 48% to $3.06, a record amount. And those 74.4 million iPhones were a 46% increase from the year-ago period.
But in the quarter ended Dec. 27, world smartphone leader Samsung Electronics Co. Ltd. (OTC: SSNLF) sold roughly the same number of phones as Apple.
And that’s got a bunch of “concerned” folks on Wall Street suggesting that Apple now depends too much on iPhone sales.
Yes, smartphones accounted for nearly 70% of revenue. But remember what we’re talking about here.
We’ve got to “Separate the signal from the noise.”
All that “concern” from the media and Wall Street is “noise.”
Here’s the “signal”: Apple will continue to grow beyond iPhone sales thanks to catalysts in at least three sectors.
You see, Wall Street is like a big club – a club that nurtures like-minded thinking and discourages dissenting viewpoints.
But, 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 blown it when they looked at Apple, causing them to miss out on three reasons the company has been on a tear ever since.
- Apple is becoming an “ecosystem” company, where its mobile devices will work with devices in the “smart home” – and where services like the cloud, iTunes and Apple Pay both magnify the value of the products and create revenue for the company.
- Apple has its eyes on the rest of the world. IPhone sales in China doubled in the quarter to roughly 14 million – and the iPhone retails for nearly double what competing Chinese smartphone-makers charge. And Apple’s success in China is part of a much larger paradigm – growth in emerging markets all over the globe. There are still plenty of countries where smartphones are new products – and Apple is going to be there when they’re ready.
- Apple is going after two extremely fast-growing markets – wearable tech and mobile payments – at the same time. Apple Pay works at more than 220,000 stores that have installed a wireless checkout terminal. Anecdotal evidence suggests it’s a hit. Morgan Stanley says the company could sell between 30 million and 60 million Apple Watches in the first year alone. That implies revenue of more than $10 billion in a market – wearable tech – that’s growing by 75% per year.
The upshot: The experts missed the fact that Apple’s shares were about to soar – but my readers didn’t.
Sixteen months after I made that call, the company’s stock has more than tripled the return of the S&P 500.
And I was able to make this call – and many others – because I always try to “Separate the signal from the noise.”
“The Noise” is just a 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.
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.
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.
- Profit Margins
These are what your boss or your accountant might refer to as the “bottom line.” 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.
- Return on Equity
This 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.
- 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.
These are the signals you’ll want to look at when deciding if you have a potential tech-market wealth builder on your hands.
That’s exactly what we do every week at Strategic Tech Investor.
Tech Wealth Rule No. 3
Ride the Unstoppable Trends
A few years ago, I spotted an emerging trend that had “Big Money” written all over it.
You see, I was one of the first to see “the cloud” for what it really was. A major tech innovation that was going to change the way we think about computing.
And I couldn’t have been more right.
According to the forecasters at Market Research Media, the cloud computing sector is undergoing a compound annual growth rate (CAGR) of 30%. And by 2020, the industry will be worth $270 billion.
That means that this sector follows Rule No. 3 of my five-part Tech Wealth Blueprint –“Ride the unstoppable trends.”
“Cloud” is just another word for the Internet. And so, cloud computing is the storage of – and access to – data and software over the Internet instead of your office’s network or your PC’s hard drive.
Cloud computing allows businesses and government agencies to cut way back on what they spend on their computer networks and IT departments. Instead, these enterprises pay cloud vendors – Amazon.com Inc. (Nasdaq: AMZN) is the biggest right now – to host data, software and applications at remote storage “farms” and deliver it all back via the Web.
While dozens of young tech firms are pushing the boundaries of cloud computing, the cloud has also turned out to be nothing short of a steroid injection for several aging tech leaders.
And of all of the older tech leaders improving cloud sales, Oracle Corp. (NYSE: ORCL) may be the most surprising.
In 2009, then-CEO Larry Ellison caused a stir when he derided cloud computing as a lot of marketing mumbo jumbo. A video of Ellison’s sarcastic remarks quickly made the rounds on YouTube.
It also made Wall Street analysts doubt the Santa Clara, Calif.-based company’s commitment to increasing cloud subscription sales and Web-based product deliveries.
But in the second fiscal quarter, ended Nov. 30, the 37-year-old company finally showed off its cloud bona fides. Oracle’s new cloud success helped the database management firm beat Wall Street forecasts for sales and adjusted earnings.
Sales rose 3.5% from the year-ago quarter to $9.6 billion, compared with analyst expectations of $9.51 billion. Adjusted earnings per share came in at 69 cents, a penny higher than forecasts.
Oracle cloud software offerings include applications for human-resources and sales departments. Those sales rose 45% from the same quarter a year earlier to $516 million.
Now serving as chairman, Ellison has become Oracle’s biggest cloud champion. He predicts new cloud bookings next fiscal year of more than $1 billion.
Of course, the cloud isn’t the only trend I’m monitoring – not by a long shot.
There are others –Big Data, synthetic vaccines and the connected car, to name a few – that are creating massive profit opportunities of their own.
In the months to come, I’ll be sharing those (and more) with you, and will show you how you can not only spot them, but analyze and exploit them to yield the heftiest profits.
Tech Wealth Rule No. 4
Focus on Growth
This next rule is really 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. (Nasdaq: ABAX), a Union City, Calif.-based maker of portable blood screeners.
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.
And going forward, I expect to see the company’s profits advance at an average annual pace of 15% for the next five years.
Product-focused innovation like this translates into substantive growth – and meaningful wealth. Indeed, $20,000 invested in Abaxis five years ago, would be worth $38,000 today.
That’s a return of 90.5%.
That’s why if you want to supercharge your investment portfolio – and get rich – focusing on growth is one strategy you just can’t ignore.
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.
The entire objective of my five Tech Wealth Rules, 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.
I see plenty of growth ahead for technology and the U.S. economy through at least 2015. Consider that U.S. industrial production in November rose 5.1% from the same month in 2013.
Also in November, the economy added 321,000 jobs. That means, for most of 2013, we’ve seen employment grow at more than 200,000 jobs per month, putting the nation on track for the strongest job growth since 1999.
And that fits right along with Rule No. 4.
More than any other sector in the economy today, high tech offers us the best chance of finding quality growth firms that consistently beat the market.
To show you just how dramatic an impact higher growth can have on tech stocks – and your wealth – let’s take a look at two high-profit examples:
Avago Technologies Ltd. (Nasdaq: AVGO) is a Singapore-based chipmaker focused on two key growth sectors. The company makes chips that speed up data centers used for cloud computing. It’s also a key supplier for the iPhone.
No wonder Avago topped analysts’ forecasts when it reported its fiscal fourth-quarter results on Dec. 4, sending shares up more than 8% that day. Avago reported earnings per share (EPS) of $1.99, ahead of the Street’s expectation by 31 cents.
And the growth trend is in its favor – over the past two years, Avago has beaten on earnings or raised forecasts several times, driving shares up shares 288% in the period. Earnings growth is so key in this climate that even big-cap leaders like Avago can find their stocks in an uptrend when profits surge.
Adobe Systems Inc. (Nasdaq: ADBE), which you know for its PDF files and Photoshop, has found new life through its new cloud subscription model called Creative Cloud.
And it all came together for the firm on Dec. 12.
Adobe beat on earnings for its fourth fiscal quarter. And the cloud growth really impressed investors – Adobe came in with 644,000 new cloud subscribers, more than 20% above analysts’ projections. Investors jumped on the news, sending shares up 9% on Dec. 13, the very day the Dow Jones Industrial Average lost 300 points.
And since I recommended the stock to my readers in May 2013, shares are up 84%, more than quadruple the Dow’s return since then.
These guys live by Rule No. 4 – and you should, too.
By focusing on growth, you greatly increase your odds of finding winning tech stocks that generate big profits.
And that’s only going to become more important in the year ahead as investors focus on earnings growth as barometers for both the U.S. economy and the stock market.
In other words, focusing on growth does two things – it gives your portfolio stability in a choppy market, and it accelerates the rate at which you create wealth.
Unlocking Tech Wealth Rule No. 5
Target Stocks That Can Double Your Money
Finding stocks that can double your money isn’t that tough – if you know what to look for.
You need to find companies that are growing earnings at high rates – 15%, 20%, 30% or more a year.
As surprising as it sounds, finding companies that are generating that kind of profit growth for the present is easy.
The trick is finding companies that can keep doing it.
And that’s where my Tech Wealth Blueprint comes into play.
These five guidelines are kind of like a shopping list, or even a recipe – a shopping list that helps you find great companies… and a recipe for the kind of wealth that gives you a stress-free life today and a worry-free retirement tomorrow.
And for my readers, FleetCor Technologies Inc. (NYSE: FLT) was one of those great companies.
Many investors would refer to Norcross, Ga.-based FleetCor as a classic “pick-and-shovel” play. It doesn’t develop smartphones or gaming software or a tech product that you’d use – or at least be familiar with.
FleetCor serves the transportation and oil-and-gas industries, providing payment cards and transaction processing. And its sophisticated algorithms help combat cyber-fraud.
In other words, it’s the kind of company whose technology let’s other companies operate efficiently.
This isn’t a “sexy” stock, but remember this.
About 300,000 “Miner Forty-Niners” traveled west to strike it rich during the California Gold Rush of 1848-1855. But it was the merchants who discovered the real “mother lode” – by selling the picks and shovels the Forty-Niners needed to pursue their dreams.
And today, clients are lining up to use FleetCor’s payment network.
The company serves more than 600,000 commercial accounts with millions of cardholders spread out across North America and 40 other countries. And last year, it conducted more than 327 million transactions, or one for nearly every man woman and child in the U.S.
FleetCor manages relationships with more than 800 partners. They range in size from mammoth oil companies to mom-and-pop shops with just a single fuel stop.
When I first recommended it in May 2013, FleetCor had increased its earnings at a 33% clip for each of the past three years. When growth compounds at that frenetic pace, a stock is on track to double in a bit more than two years.
In fact, FleetCor was – and remains – such a cash machine that I expected it to grow earnings per share at an average annual rate of at least 22% in the next two years.
As part of Rule No. 5, let me show you a neat trick that makes it simple to figure out how long it will take for you to double your money with any particular company.
Mathematicians call it the “Rule of 72.”
But I like to refer to it as my “Double Your Money Calculator.”
If you know a company’s earnings growth rate, the Rule of 72 lets you estimate how long it will take for its stock to double. You just divide 72 by the growth rate and you have your answer – in this case 3.3 years. (Doubling calculator: 72 divided by the 22% growth rate = 3.3 years to double.)
And that’s just what FleetCor did for my readers – in fact, it did quite a bit better.
Since I recommended it in May 2013, when it was trading around $75, its shares have more than doubled to $154 – in less than two years months.
And I’m looking at FleetCor’s earnings to continue to surge in the months and years to come.
It doesn’t take many gains of this magnitude for you to see a major impact on your personal net worth.
Profits like that turn dreams into reality. You can sail the Florida Keys… take that trip to Italy… or buy that Audi A6 you’ve had your eye on.
Or maybe you’re a “Millionaire Next Door” type – and you simply seek the security of a no-stress retirement.
Whatever your goals, wealth will help you achieve them. And the road to that wealth is paved by tech.
Cheers and good trading,