“No man ever steps in the same river twice.”

Those words were uttered by the ancient Greek philosopher Heraclitus (circa 500 BCE), who was best known for his doctrine of “universal flux.” The only constant in life, he taught, is constant change.

Heraclitus would have loved our portfolio. Breakthrough Tech Profits is predicated on the belief that things are always changing. The companies that are tapped into constant change will prove the most profitable, especially in the tumultuous times we’re witnessing today.

But to differ with Heraclitus, there’s at least one thing that never changes. The importance of corporate earnings season.

First-quarter earnings have been solid, cheering investors who are worried about rising bond yields and a brewing trade war. Technology industry bellwethers such as Facebook (NSDQ: FB) have posted blowout operating results, igniting a rally in the Nasdaq.

The “FAANG” stocks have bounced back from their recent battering. The semiconductor sector also is resurgent, on the strength of solid first-quarter operating results from key chipmakers.

Rockets on the launch pad…

As the overall tech sector recovers, the small-cap players are poised to blast off in 2018. This publication is dedicated to breakthrough technologies, but even in this narrowly defined realm, I strive to create diversity and balance. The BTP portfolio consists of small-, mid- and large-cap players, in a wide variety of tech sub-sectors. We’re not overly concentrated in any one area.

Six of our holdings sport a valuation of between $100 million and $1 billion, which is generally defined as small cap. One advantage of this size is the insulation it affords against headline risk, which currently looms large.

Small-cap stocks are closely tied to the U.S. economy and typically have less exposure to the global market. They’re safer plays when geopolitical turmoil, such trade conflict, rears its head.

All of our stocks, regardless of market cap, have one trait in common: they’re “disruptors” that are changing the rules of the game.

The main stock indices have recovered from recent lows, but the bulls lack long-term conviction. Notably, excitement over the U.S. tax overhaul seems to be waning as the implications become clearer.

Tax cuts give a big one-time boost to corporate bottom lines. But over the long haul, the price will be massive federal budget deficits that seem likely to generate economic and financial instability.

Whether shareholders benefit from the tax windfall depends on how corporations use the money. Forward-thinking management will devote the cash to investments that produce organic growth.

That’s what sets our BTP holdings apart. A major criterion that I look for in a stock, before granting it inclusion in the portfolio, is whether management makes consistent investments in research and development (R&D).

The tax cut bill signed by President Trump in December slashes the top corporate rate, but it also allows tech firms that have stashed cash hoards overseas to repatriate that cash for taxation at a lower domestic rate. Many tech firms already have announced their intentions to use this money to fund acquisitions of smaller innovative firms, boost R&D, and hire expensive talent.

A quartet in tune…

Let’s look at the latest earnings results from a quartet of large-cap holdings:

• Alphabet (NSDQ: GOOG)

Alphabet beat consensus expectations on both the top and bottom lines.

Alphabet’s earnings per share (EPS) in the quarter came in at $9.93 versus $9.28 expected by Wall Street. Revenue reached  $31.15 billion versus expectations of $30.29 billion.

Google’s core advertising business racked up most of Alphabet’s revenue, posting $26.64 billion in the first quarter, up nearly 20% compared to the same quarter a year ago. Google didn’t provide detailed numbers about its cloud unit, but management said it experienced significant growth in the quarter. Alphabet is a buy up to $1,050.

• Microsoft (NSDQ: MSFT)

Microsoft reported EPS of 95 cents vs. 85 cents per share as expected by analysts. Revenue came in at $26.82 billion vs. $25.77 billion as expected by analysts.

Management issued guidance of $28.8 billion-29.5 billion in revenue in its fiscal fourth quarter. Analysts had expected the company to forecast $28.01 billion in revenue for that quarter.

The big takeaway is Microsoft’s spectacular growth in cloud revenue. Azure first-quarter revenue soared 93% and Dynamics 365 Software-as-a-Service (SaaS) revenue jumped 65%. Both segments posted better-than expected growth. Significantly, the size of Microsoft’s cloud business now exceeds that of Amazon’s (NSDQ: AMZN).

Microsoft is a buy on dips to $75.

• Taiwan Semiconductor Manufacturing (NYSE: TSM)

Taiwan Semiconductor Manufacturing’s first quarter EPS of 59 cents missed the consensus estimate by a penny. Revenue of $8.46 billion represented a year-over-year increase of 13% but missed expectations by $70 million.

Chip demand has softened, especially for smartphones. However, TSM has been plowing considerable resources into advanced technology that should help the firm overcome fluctuating demand.

TSM’s Chief Financial Officer Lora Ho stated during the firm’s recent first-quarter earnings conference with analysts:

“Going forward, we expect our annual CapEx in the next few years will be ranging between $10 billion and $12 billion. Now let me explain how we are able to support our 5% to 10% long-term growth with a similar level of annual CapEx as the follows. For the existing capacity, we are able to grow capacity through productivity improvement, that is, for the same tours, the output can increase every year through our engineering efforts and innovations. This way, without spending fresh CapEx, we are able to grow capacity to support growth.”

That’s a wise strategy that should bear fruit in 2018 and beyond. Taiwan Semiconductor Manufacturing is a buy up to $50. 

• Texas Instruments (NSDQ: TXN)

Texas Instruments reported EPS of $1.21, 10 cents above consensus forecasts. The chipmaker’s revenue also beat estimates. Revenue came in at $3.79 billion in the period, versus expectations of $3.65 billion.

The Dallas-based chipmaker is poised for double-digit earnings growth over the long haul. The average analyst expectation is that year-over-year earnings growth will come in at 14.40% in the current quarter, 19.40% next quarter, 14.70% in the current fiscal year, and 13.20% next year.

My own calculations show that TXN should rack up five-year earnings growth (on an annualized basis) of at least 12%.

Texas Instruments boasts several core advantages, including manufacturing prowess in 300-millimeter chips, which provide greater production efficiencies; a broad product portfolio; and a widespread sales channel. Texas Instruments is a buy up to $105.

John Persinos is chief investment strategist of Breakthrough Tech Profits.