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US equity markets have run hard over the last two years; the S&P 500 is trading at record levels of over 2110, and the tech-heavy Nasdaq is trading at over 4950, very close to its all-time record-high closing of 5048.62, achieved back in 2000 during the dotcom boom.
Last year in particular was a good year for US equities as an increasingly stable and energetic US economy, combined with solid corporate earnings and various supportive global trends, underpinned a strong bull run. In contrast, 2015 has been a more ambiguous year for US equities so far. Although stocks have trended upwards, there has been a great more volatility in the markets, and there are conflicting outlooks for the rest of the year.
Against this backdrop, it may sound strange to suggest that now is the time to buy US tech stocks. But hear me out.
Tech stocks aren’t all the same
When people think about tech stocks, they tend to think about whatever is new and sexy. So, right now, the phrase “tech stocks” might bring to mind hot properties like Uber, Snapchat, or perhaps even Twitter. But for every sexy new thing with a high stock price, a cool CEO, and negligible earnings, there’s a solid business with good management, strong earnings, and a healthy balance sheet.
And it’s these mature, entrenched tech companies that look like a reasonable bet for the discerning investor. Now is definitely not the time to be taking a punt on a company with no earnings history and a lot of cool ideas – the bull market has pushed the valuations of such companies up much higher than they probably should be. But a company like, say, Intel, which has a strong balance sheet, a product that will sell as long as we need computers (or, really, data processing capacity), a deep pool of management talent, and a history of delivering solid, reliable earnings and dividends is a different story altogether.
Tech stocks are cyclical
Cyclical stocks are stocks that improve when the economy improves. They are the opposite of defensive stocks, which perform regardless of the economic cycle. For example, restaurants and cars are a cyclical business – when times are good people eat out and buy fancy new cars, when times are tough, people eat at home and drive their clunkers for another year. Utilities and food are non-cyclical – people need electricity, water, and food no matter where we are in the economic cycle, so those stocks tend not to see sales rise and fall with the tide.
Tech stocks are, to a large extent, cyclical. When the economy is in a bad patch, companies don’t spend a lot of money upgrading their IT systems, advertisers don’t spend a lot of money trying to sell stuff, and individuals don’t line up en masse for the latest gadgets; when times are good, they do. That means that companies like Cisco (which builds servers for corporate use), Google (which makes most of its money from online advertising), and Apple (which sells shiny and desirable tech objects) see revenues fall off in the bad times and rise when the economy strengthens.
Right now, the balance of data suggests that the US economy has successfully turned things around. House prices are starting to rise, consumer spending is looking solid (thank you oil price), and most importantly, unemployment is falling. US companies have been stockpiling cash in expectation of better days since 2009, and now that they’re here, it’s very likely that they will be spending some of it on upgrading their IT infrastructure. US consumers have jobs again, and thanks to the low oil price, they have more discretionary income, which means they are probably eyeing new gadgets with a buyer’s eye. All of this means that tech stocks are well-positioned to benefit from the upturn in the economy (indeed, Apple’s record-busting earnings indicate that this is already happening).
Tech stocks have good balance sheets
One thing that could potentially derail tech stocks and other cyclicals is the prospect of rising interest rates. Rising rates eat into corporate earnings because companies have to pay more for the money they borrow to invest in capital projects and so on. Happily, this probably won’t be a problem for tech stocks – most of the blue chip, mature companies in the tech world are sitting on massive cash piles. In fact, according to Daily Finance, tech companies are sitting on fully half of corporate America’s total cash reserves, a cool $515bn. With that kind of money, they aren’t going to borrowing anytime soon, plus they have the cash to engage in shareholder-friendly things like share buybacks or special dividends.
Given all this, you might want to think about making some room in your portfolio for mature tech stocks – something like the iShares U.S. Technology ETF, which holds all the giants like Apple, Microsoft, Intel, Google and so on would fit the bill nicely. As always, of course, you should talk to your financial adviser, and make sure that investing in tech stocks fits in with the rest of your portfolio, your investment goals, and your risk profile.
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