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Although I speak with Money Map Press Editorial Director Bill Patalon almost every day, it's been some time since we actually engaged in a full-fledged question-and-answer session for your benefit.
In today's conversation, Bill asks me about my outlook for tech stocks and helps me outline a risk-management strategy every investor should follow (especially now). And together we highlight the half-dozen tech stocks that will point you down the road to meaningful wealth.
Bill Patalon (Q): Michael, the Nasdaq Composite Index recently eclipsed the 5,000 level for the first time since the dot-com bust-up of 2000. And that brought the gloom-and-doomer crowd out of the woodwork in droves.
But you have an interesting take on this. You've said that - while volatility will likely increase in the near term for all stocks - you are more confident than ever for the longer term investment outlook of Silicon Valley and high technology.
Michael Robinson (A): That's right. In all the years I've been around Silicon Valley, I've never seen so much innovation reaching a point of critical mass all at the same time. A recent research report I read said that, on average, we're seeing roughly $1 billion worth of new tech opportunities coming out per week.
We are well beyond what I call the "Tech Tipping Point." Bear in mind that, back during the whole dot-com saga of 2000, most folks had dial-up Internet. Now we have broadband that is at least 100 times faster. Which gives us Netflix Inc. (Nasdaq: NFLX), Pandora Media Inc. (NYSE: P) and such Apple Inc. (Nasdaq: AAPL) services as iTunes and Apple TV.
There were no smartphones, no tablets and no connected car. Amazon.com Inc. (Nasdaq: AMZN) was just selling books. There was no such thing as cloud computing. And e-commerce was hardly the threat to brick-and-mortar stores that it is now.
Despite these differences, the stock prices we're seeing for technology firms today remain quite reasonable...
The Nasdaq 100 has a forward P/E of 18.75, pretty much in line with the S&P 500′s forward valuation of 17.5.
BP: In line - which doesn't reflect the much higher earnings growth you get from technology firms - correct?
MR: That's right, Bill.
BP: And there are other differences, too, aren't there?
MR: There are, Bill, there are.
Back in 2000, most tech firms didn't pay a dividend. These days, a big part of the growth in dividends is coming from the tech sector.
BP: Not to mention the billions in buybacks we're seeing from high-tech companies.
MR: That's right. And we're seeing all this - the dividends and the buybacks - because tech firms have been generating enormous amounts of cash for years, because they're sitting on huge cash hoards and because we can expect those hefty cash flows to continue - at least through the end of this decade.
BP: You and I talk pretty much every day. So I'm exceptionally aware of your bullish outlook for high-technology companies. In fact, it's a view - a long-term view - that we share. We both believe that, for the first time ever, there's a technology "ecosystem" that's taken shape. And that ecosystem represents a powerful profit generator.
MR: Absolutely correct, Bill.
BP: So let's explain this to our readers. So we have these "pools of innovation" - specific ones such as the cloud, Internet of Everything (IoE), wearables, Big Data, digital payments and others - each represent standalone growth-and-profit opportunities.
MR: And big ones, at that.
Actually, that's a great place to start. So before we move onto the whole "ecosystem" concept, let's talk about these "pools of innovation."
We're talking, here, about billions of dollars' worth of growth potential in each of these discrete sectors. I mean, if someone wants proof - you know, numbers - look right at mobile. We're shipping more than a billion smartphones a year, and just the mobile-payments part of the industry is expected to hit $720 billion by 2017 - a tripling in size in roughly five years.
Cloud computing is expected to reach $270 billion by the end of this decade. By that time, the Internet of Everything will be worth nearly $1 trillion, and Cisco Systems Inc. (Nasdaq: CSCO) says the profits alone from this sector will hit $14 trillion in the years ahead.
Big Data is expected to be worth $32 billion by 2017. And the year after that, just the MEMs (microelectromechanical systems) slice of the sensor market will be worth $22 billion - having doubled in just six years.
BP: And don't forget semis - semiconductors - which are native to just about everything these days.
MR: Right. Last year, chip sales set a new record. Total semi sales came in at $335.8 billion in 2014. That's a year-over-year increase of nearly 10% from the year before.
Not bad for a business that's supposed to be "mature."
BP: The difference, of course, is that - for the first time ever - these pools of innovation are converging to create "ignition points" for hyper-growth ...
MR: And hyper-profits.
BP: That's why this is a time of such remarkable opportunity for investors.
MR: Yes, it really is a unique point in time. Never before have we been able to look and see so many converging, or overlapping, technology trends. They drive each other. They reinforce each other. And they magnify each other.
It's just such a powerful concept.
BP: You shared a great example with me during one of our calls earlier this week. We dubbed it the "Super Internet." Tell the readers about it, too.
MR: Okay, sure. Absolutely. Look at the IoE - the Internet of Everything. This "Super Internet" will connect trillions of devices all over the world. That, in turn, will continue to drive demand for semiconductors and sensors needed to make common objects become "intelligent."
BP: A true "ignition point."
MR: That's right. And what's so exciting is that the semis and sensors are merely the start of this mega-convergence. All those connected devices will create a tidal wave of Big Data to sift through, analyze, make use of, and store. That's more data than individuals can store locally, which will help drive cloud computing. We'll need software to analyze and use the data. And faster computers. And portable storage devices so analysts, scientists, students, and investors can use small slices of that data.
BP: Once it's been ignited, you can see how this becomes a truly self-perpetuating cycle.
MR: You can, and we're not even finished.
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Look at the "connected car." That's another "ecosystem" altogether. We're selling more than 16 million cars and light-duty trucks a year in the United States alone. Starting in 2018, all of them will have backup cameras.
MR: Absolutely. And the convergences - the "ignition points" - don't end there. Not by a long shot. Millions of vehicles will also have lane-assist, collision-avoidance, self-parking and self-braking technologies - driving demand for sensors, semiconductors and software. These cars and trucks will come equipped with de facto tablets and integrate to Bluetooth and Wi-Fi, again creating more demand for cloud storage and retrieval and setting up even more Big Data flows.
BP: So how does the investor derive maximum benefit from what clearly is a major, massed profit opportunity? I mean, we know that the "trick" - and I hate to use that term - is to get into the long run. To do that, you need to avoid near-term miscues, which become so much easier to make when markets are volatile.
MR: That's right. Yes, we will have downturns in the market, as we always do, but this is no time to sit on the sidelines. On the other hand, you can't just throw caution to the wind.
First, you need a system to find the right opportunities. That's why I established my five-part strategy for building wealth through tech - "Your Tech Wealth Blueprint." It's a great way to identify winners and make money in good times and bad, and I share it freely at Strategic Tech Investor.
This is the type of market where you want to pay particularly careful attention to solid portfolio-management tools. These can help you add to your overall gains and protect your valuable risk capital.
In this market, you have to pay close attention to buying and selling points and when to take profits along the way. I expect volatility to continue at least through the end of next year - and probably well into 2016 for that matter.
There are lots of reasons, but we can boil it all down to a three key factors.
First, we are back to a market top. That alone has folks worried that the bull market will come to a grinding halt now that we are in the sixth year.
Second, you have the Fed worrywarts. A lot of investors who should know better believe the only thing driving the bull market is the easy-money central-bank policies of the last five years. But, as we've seen, positive economic conditions overall are driving the market higher.
And third, you have an epic tug of war between two schools. One says the rising dollar will shred profit margins for U.S. firms and cause growth to slow down. The other school believes that falling oil prices will be a huge boon to the U.S. economy by lowering the cost of production and putting more money in the bank accounts of consumers, who account for two-thirds of gross domestic product (GDP).
BP: For markets like this one - any, in fact - you have a three-tiered strategy for risk management and maximum profit. Could you talk about that? Let's start with how you manage risk when buying stocks in an environment like this - the so-called "Cowboy Split."
MR: The split you're talking about - and which my readers have used to their advantage - involves making staggered entries on stocks that we believe have a lot of upside. But that could face some near-term downside risk due to market volatility. The strategy works very well in a choppy - but up-trending - market like the one we're dealing with right now.
You start by buying a portion at market. Then you put in what's called a "lowball limit order" - meaning, for instance, that you buy another "tranche" when the price falls by say 20% or so.
Doing this allows you to buy on the dips in a disciplined, systematic way. You avoid getting stopped out of a potential big winner and can really bolster your gains. It's not unusual for the gains on the discounted portion to be double those of that first entry.
BP: The second part of your risk-management strategy involves your willingness to take profits. In strong bull markets, I know you use something called the "free trade" strategy. But in more uncertain markets like this one - which we've referred to as "Moneyball Markets," in homage to the Oscar-nominated baseball flick we both like - you pull the trigger on profitable trades a bit more quickly. Explain why.
MR: This all goes back to the portfolio-management tools we discussed a moment ago.
I have a standing rule I call the "free trade." Whenever a stock has gains of 100%, you should sell at least a portion of it. If you were to sell half, you'd have a "free trade" because you recoup all your original investment and are then playing with the house's money.
But in choppy markets like we have today, I advocate taking smaller gains along the way. These days, I've been known to take some gains off the table at the 25% or 30% mark.
BP: Especially when those gains come quickly - as in days or weeks after first placing the trade.
MR: That's right, Bill. Recently, in my Nova-X Report service, we took gains on one stock that was up 35% and another that was up about 45%. No, these aren't "free trades," but they're still market-crushing gains that we've protected from volatility.
BP: Okay, the final piece of this a defined risk-management technique that's designed to cut losses short, while ensuring that, with profitable trades, you keep at least some of that profit, should the stock reverse course after a gain.
Michael, talk about trailing stops and their importance.
MR: What you're referring to here, of course, is the "trailing stop."
This tool lets you cut losses short, and lock in gains - kind of on autopilot.
Now I realize you use a 25% "stop" in Private Briefing. In my advisories, I typically set a stop 20% below our purchase price. And that "stop" moves up as the stock surges, in essence "trailing" the stock as it moves higher.
BP: Run a quick example to show how it works.
MR: Sure thing, Bill. For instance, if your stock is up 20%, set the stop at your entry. You'd lose some profits but walk away with all your original capital. If you're up 40%, set it so you make 20% no matter what happens, and so forth.
BP: At this point, are you concerned about a correction? If so, how concerned? What would it look like, and how would you play it?
MR: Look, I believe we are in the midst of a generational bull market, especially for tech. But we're not immune to the laws of finance.
At some point in every bull market, we get a correction. It's not only expected - it's healthy. It shakes out the weak money, the speculation, and gets investors more sharply focused on meaningful value creation. It's kind of like clearing out dead vegetation so the next forest fire isn't as severe.
The truth is no one at this point knows exactly what the correction will look like in terms of speed, depth and duration. But my general plan is to look for bargains - especially with stocks that meet my five Tech Wealth rules.
A good thing to do is prepare now by following the rules and tactics we've been talking about today. Also, I'm keeping my powder dry now so I'm flush when the discounts come rolling my way.
BP: What's your outlook for the U.S. economy? How about for the global economy?
MR: In the United States, we're on pretty sound footing. The great untold story of the recovery is that about $2 trillion of the capital the Federal Reserve pumped into the system is still with the banks in what's called an "excess reserve trap."
Here's what that tells me: The economy has been mending pretty much on its own. Consumer confidence remains high, CEOs are still planning to expand and we recently have had the best stretch of jobs growth we've seen in years.
New technology is driving a massive auto sales cycle that is also helping the economy and driving more demand for tech.
Globally, growth is a challenge. Europe is stimulating to catch up with the U.S. and to take advantage of the strong dollar. China's growth has slowed, but it's still around a very healthy and robust 7%.
But even with those struggles, tech makes an impact. Intel Corp. (Nasdaq: INTC) has ramped up PC-chip production in Vietnam and has ignited a massive tech-investing cycle in that emerging economy.
BP: What sectors do you like?
MR: What sectors don't I like? [Laughter from both.]
Well, life sciences is at the top of the list. We are looking at decades of steady growth. Just the 76.5 million baby boomers in the U.S. will drive demand for drugs, medical devices and backend support like diagnostic tools, the cloud and data analytics.
We are nothing without semiconductors, so I think you to have at least some exposure to microchips. Semis are integral to smartphones, wearables, data centers, routers, so-called "Smart TVs," autos, avionics and much more. Sensors are in that segment, as well, and will see years of growth.
One area we haven't talked about much lately is "Miracle Materials." Again, touch-sensitive glass is integral to the world around us. So, too, is silver as a key electronics component - and it's oversold right now.
I would add to that wearables, where we're just getting started, mobile security and payments, and, of course, the cloud and Big Data.
BP: Could you share a few favorite recommendations.
MR: Sure thing. And it's interesting, because I believe a number of these are stocks you've brought to your folks in the past. But I still like these here.
First, because we're talking about "ecosystems" in technology, we have to talk about Apple Inc. (Nasdaq: AAPL). It actually started this ecosystem discussion.
I also like the aforementioned Ambarella as a semiconductor play on 4KTV, IP surveillance and on the hugely popular GoPro Inc. (Nasdaq: GPRO) wearable cameras. I know you like Ambarella, too, and that your folks have done quite well with it.
I've talked about Bitauto Holding Ltd. (NYSE: BITA) as an e-commerce play on China's car market. That stock just crashed and is trading at $46.50. At that price I'm swooping in "Cowboy Split" style and riding it for the long haul.
In biotech, I still see a great deal of potential for Repligen Corp. (Nasdaq: RGEN), another member of that portfolio. It makes protein A used throughout the industry. That stock jumped more than 15% one day last week but still has a lot of upside left.
BP: Thanks, Michael. It's always great to host one of these "sit-down" talks with you.
MR: I feel the same way. Now, let me wish you folks a good day - I'll see you all back here next week. Meanwhile, have a great weekend.
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About the Author
Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...
- He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
- He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
- As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.
This all means the entire world is constantly seeking Michael's insight.
In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.
Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.
And even with decades of experience, Michael believes there has never been a moment in time quite like this.
Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.
To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.
His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.