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Investing icon Peter Lynch had a key tip for investors who were looking to cut through the uncertainty to find winning stocks.
His advice: Invest in what you know.
It's a great bit of advice - even when talking about tech stocks.
And it's a great bit of counsel.
In a wild-and-wooly market like the one we're navigating now, focusing on a company whose products, services, and technologies you know, like, and use can give you one heck of a competitive advantage: You'll zero in on discount stocks before the deep-pocketed investment pros even realize there's a bargain to grab.
Today, I'm going to tell you all about one such tech play. It's a company I've been following for more than 30 years. And I've been using its technologies for almost as long.
In short, I'm going to tell you all about a stock that I know.
And I'll do more than just tell you about the company. I'm also going to walk you through the five "screens" that explain why this beaten-down tech leader should be on your personal "watch list" right now.
A Tech Company You Can Depend On
My professional life has had many interesting facets.
I've spent years as a newspaper reporter. I've written books. I've advised startups. Then I finally moved into investment analysis.
Tucked in among all those experiences was still another profession.
I was a musician. And a very serious one, at that.
One company seems to have evolved with me - offering technology that I've worked with virtually every step of the way.
That company is Adobe Inc. (NASDAQ: ADBE).
During my years in music, I would have artwork designed for my CDs. I'd also need to have photographs professionally edited and color-corrected.
And during my years in journalism, writing, and communications, I relied heavily on desktop publishing.
Adobe helped me with all that.
The company is highly regarded for such products as Illustrator for creating, editing, and managing graphics as well as Photoshop for managing and editing pictures.
Like most technology companies, Adobe continuously updated its offerings - keeping them current with contemporary needs.
At the same time, Adobe shrewdly evolved as a business.
Back in 2009, the firm quietly began moving from a "sales" model to a de facto "rental" model. This means users pay monthly fees on an ongoing basis to gain and maintain access to a range of products delivered via the Web, or "the Cloud."
I loved this shift.
Loved it. And for good reason.
It's not just because the global cloud market is growing at 21.4% a year and will be worth $185.8 billion by 2024, according to KBV Research.
It's something far more fundamental. A well-run firm that uses the cloud to deliver software as a service (SaaS) has two factors operating in its favor that hardware companies can only dream about.
The first is high profit margins. The second - which is even better - is recurring revenue: The money literally rolls in month after month after month.
The bottom line: Companies that made the move from software publishing to SaaS via the cloud can really clean up.
All along the way, Adobe made other moves to fuel this transformation.
In 2018, for instance, Adobe made another key move: It snapped up the privately held Magento Commerce for $1.68 billion. That purchase optimized Adobe's focus - from a narrower one involving only digital content management and related analytics into the much broader e-commerce.
At the time of the merger, Magento said it handled more than $150 billion in gross merchandise volume. For a bit of context, that's nearly double the $88.4 billion that eBay Inc. (NASDAQ: EBAY) handled in 2017, according to numbers from FactSet Research.
Let me show you why I say all this by running Adobe through the five "screens" we use to identify stocks that can truly help you build wealth.
Tech Wealth Rule No. 1: Great Companies Have Great Operations
I'm talking here about well-run firms captained by top-notch leaders.
One way you can judge that is by taking a look at key partners. And Adobe is working closely with Microsoft Corp. (NASDAQ: MSFT), one of the world's very best cloud-services players - and a firm that itself made the jump from software publisher to the SaaS model.
Microsoft ranks No. 2 in cloud hosting behind Amazon Web Services. Back in December, Adobe and Microsoft unveiled a sweeping alliance. Adobe Experience Cloud and Adobe Document Cloud integrated with Microsoft's Dynamics 365, Office 365, LinkedIn, and Azure cloud infrastructure services.
The move gives Adobe access to 180 million of Microsoft's commercial customers. Adobe has said it's getting a "phenomenal response" for the Microsoft integration.
Tech Wealth Rule No. 2: Separate the Signal from the Noise
To create real wealth, you have to ignore the hype and find companies that have rock-solid fundamentals.
The market's wild panic over the spread of the coronavirus - aided by saturation media coverage - has hammered stocks across the board. In situations like Adobe, what gets lost in all that market "noise" is the fact that this is an innovative, well-run firm.
Adobe has pre-tax profit margins of 39% and the exact same figure for return on stockholder's equity (ROE). Not only that, but it generates nearly $3.6 billion in free cash flow (FCF).
Tech Wealth Rule No. 3: Ride the Unstoppable Trends
I absolutely love to find stocks operating in red-hot sectors - because they offer the best chance for life-changing gains.
Earlier, I noted that overall cloud sales are growing at 21.4% a year. At that rate, they are doubling every 3.4 years. So, Adobe has focused on a market that is clearly experiencing a very long-term trend.
The firm says that - as of the end of this year, when you add up of all of its various services - its total addressable market will be $80 billion. That's actually more impressive than it sounds.
Back in 2009, Adobe had zero cloud sales.
Last year, revenue totaled nearly $11.2 billion, much of it focused on the cloud.
Tech Wealth Rule No. 4: Focus on Growth
Companies that have the strongest growth rates almost always offer the highest stock returns.
Over the past three years, Adobe has grown its sales an average of 24% annually, meaning the firm is doubling sales roughly every three years. But it did even better in its most recent quarter, with sales rising 33% on a year over year basis.
At that rate, sales could hit $22.4 billion by the end of 2023. By 2026, they could come in at a stunning $45 billion.
Tech Wealth Rule No. 5: Target Stocks That Can Double Your Money
I love this rule - it just makes so much sense. To ferret out stocks with this potential, you need to look at the firm's earnings, its earnings growth rate - and then calculate how long it will take to double profits.
By doing that, we can figure out how long - on average - it should take for the stock price to double, as well.
With Adobe, after a detailed review of its financials, I'm able to project that earnings per share (EPS) will grow by an average 30% over the next three years.
This is actually a conservative forecast.
The fact is that - over the past three years - Adobe has grown its EPS at an average annual rate of 37%.
That figure dropped a bit in the most recent quarter - but only to 33%.
To be conservative, I actually reduced my growth-rate estimate to 30%.
By inputting that number into my "doubling calculator" (an equation mathematicians refer to as the "Rule of 72"), we find that the stock should double in 2.4 years (No. 72/EPS Growth Rate of 30% = Doubling Time Frame of 2.4 years).
For the 12-month stretch that ended Feb. 19 - when Adobe hit its most recent high - the company's shares had risen 48.7%. That's more than double the return of the S&P 500, which rose 21.8% during that same time frame.
Combine all these factors together, and it's clear this is a tech leader that should be on your personal "watch list."
If you decide to take action in this uncertain market, we recommend you start out with a small position and add to it over time as the market regains its footing, or as the stock stumbles in concert with sell-offs.
And in the meantime, check out this briefing that my colleague Neil Patel fast-tracked for you, live from self-quarantine...
You see, in a few minutes, Don Yocham and Neil Patel are going live straight from the secure Private Dealroom. They'll be video conferencing with the founder of a company - he's one of the most prestigious doctors in the world. This deal recommendation is anything but ordinary.
In fact, they made sure all the research and analysis was expedited to get it into your hands as fast as possible. The reason is simple: This startup just finalized a medical device that could completely revolutionize a $19 billion industry.
If you want to learn more, you must hurry. After April 24, this opportunity will be gone for good. Just click here to attend...
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.