Part 5: Profiting from “The Utility Stocks of the Future”
During the past four weeks we have explained how tech companies differ from every other sector of the stock market, and why that requires an entirely different methodology for evaluating them. Unlike traditional stock market sectors that have already reached maturaty, the tech sector is only halfway through its maturation cycle. Going forward the emphasis will shift away from companies that create entirely new product lines towards those that take existing product lines and enhance their functionality via the process of innogration.
This has very significant implications for investors, as the tech sector will begin to consolidate leaving in its wake clearly distinct sets of winners and losers. The losers will either disappear altogether, or be consumed by their better capitalized competitors as innogration converges on its logical endpoints. Those companies left standing will become “the utility stocks of tomorrow”, paying out a reliable stream of healthy dividends while delivering steady growth with minimal volatility.
Investors waiting for the “next Microsoft” or “next Apple” will be left behind, as those market leading companies have already assumed positions of financial domination that cannot be usurped by startups or competitors with significantly less cash. Any undersized competitor that comes along with a better product or feature will simply be acquired or innograted by one of these market behemoths. In other words, the market leading tech companies of tomorrow will come out of the pool of companies that exist today.
Walking Among the Dinosaurs
Until scientists find a way to accomplish the genetic engineering necessary for Jurassic Park, the closest experience any of us will have to walking among dinosaurs is investing in some of the tech stocks alive today. It’s no secret that BlackBerry is already close to extinction, and Hewlett-Packard may not be far behind if it makes one more major miscue. But since their prospective demise is already apparent there isn’t much opportunity left to profit from their eventual downfall.
However, there are dozens of other companies that are destined for future extinction that are not so obvious. In fact, some of them are currently trading at huge multiples on the expectation of continued growth, skyrocketing to almost unthinkable levels. For example, social media stocks such as Facebook and Twitter shot up in value in 2013 even though their long term revenue models are coming increasingly into question.
The Smart Tech Rating system that informs our buy recommendations can also be used to identify excellent opportunities to profit from a grossly overvalued stock by using put options or shorting the stock. Some tech stocks are “hothouse flowers” that thrive under the warmth of ultra-accommodative FED monetary policy, but will quickly wilt once tapering begins and the cool winds of economic reality start to blow. We know who they are, and can show you how to profit off of them before they go the way of the dinosaurs.
Riding an Elephant
If you ride an elephant, you’ll never have to worry about what you may run into. That’s why Warren Buffett prefers to buy stocks of companies that have strong brands and even stronger balance sheets. He knows these companies will continue to generate huge cash flow for decades to come, even during temporary market downturns.
The utility industry is very popular with investors for the same reason. These “essential service” companies provide a good or service that is essential to life, and for which there is no viable substitute. Unfortunately, almost all of them operate in a highly regulated environment that places strict limits on the rates they can charge for those services.
The good news is that most tech stocks will never have to operate under profit-limiting restrictions, even though they provide goods and services that enjoy a level of demand equal to or greater than most traditional utilities. Over the next ten years the surviving tech stocks of today will become the unregulated utility stocks of tomorrow, stampeding over their weaker rivals like elephants in a cornfield.
Next Issue: The Tech Outlook for 2014
Read Part 1: Technology – A Divergent Sector
Read Part 2: Understanding “Innogration”