Technology will be the one sector of the economy you can count on for high growth in 2017.
That may sound hard to believe, because tech slightly lagged the broader stock market through the first 11.5 months of 2016. But that was largely because life sciences fizzled.
But tech stocks are going to resume their leadership position in 2017.
Therefore, if you're one of the millions of Americans trying to put together enough money for a stress-free retirement, technology is where your focus should be.
In this wide-randing interview with Money Morning Executive Editor William Patalon III, I lay out my "case" for tech's resurgence, talk about the surprising benefits incoming U.S. President Donald Trump will have on American innovators, and outline a strategy for maximizing high-tech profits in 2017.
VR Becomes a Profit Reality
William Patalon III: Before we talk about specific technologies, talk with me for a moment about your overall view for high tech in 2017. Is it an upbeat view? A modest view? How does that compare with the consensus? What are the keys to your prediction? What has to happen for your "call" to become reality?
Michael A. Robinson: As a group, technology is going to have a great year. Fact is, tech is the one sector of the economy you can count on for high growth. The incoming administration of U.S. President-elect Donald Trump has said it is targeting domestic growth of 4%, which is 66% higher than what we've had in the last eight years. Whether it's cloud computing, Big Data, or the Internet of Everything (IoE), tech fields can grow much faster than the overall economy, which is why you can trounce market returns – if you pick the right leaders.
WPIII: Michael, it probably makes sense to start with a technology that's getting lots of attention – virtual reality, or VR. And let's broaden that to also taken in augmented reality (AR).
I remember walking through a Wal-Mart with my 9-year-old son, Joey, earlier this year and seeing a big display for VR. Given that retailer's target market – more of a mainstream, bargain-seeking crowd than one of "early adopters" – I believe that shows how virtual reality was poised to become a "mainstream" technology in 2016 and 2017. Explain how big this could be… and why. How will we "see" VR and AR?
MAR: Funny you ask that, Bill. Just last night I was watching the action movie Kingsman: The Secret Service. There's a scene in which two characters at a boardroom table don special glasses and hold a "virtual meeting" with directors who aren't actually there. We're on the cusp of seeing that happen regularly throughout the global supply chain, touching everything from manufacturing to logistics to corporate seminars and meetings. As you observed, these two related technologies – VR and AR – will achieve a "critical mass" in the New Year as consumers use virtual reality for games, movies, and more, and as big enterprises embrace augmented reality for improved productivity. For 2017, Microsoft Corp. (Nasdaq: MSFT) is pushing its HoloLens as a holographic computing platform that works for gaming and entertainment – and that also works as a business platform for virtual meetings, product design, and more.
WPIII: So if you're going to play VR, what's the best way to do so?
MAR: Actually, I think the single-best play in the overall "reality field" is a small-cap firm that is in my Nova-X Report Portfolio. This tiny company is way ahead of the sector right now with its state-of-the-art smart glasses. And readers of my Nova-X newsletter are now up 70.1% on their shares – and they've made peak gains of 135.6%.
The Smart Profit Play
WPIII: There's another, similar story here – another field of technology that's long been rumored to be "ready for prime time" – which up to now hasn't delivered on its promise. I'm talking about artificial intelligence, or AI. We've been hearing for years how AI was "on the doorstep" – only to be disappointed. But it clearly now appears as if AI is reaching a critical mass of its own. What changed? What are the catalysts or "triggers" at work here? How will it be used? How are tech leaders tailoring breakthroughs in AI to make computers more natural?
MAR: Great, great question, Bill. And you've described the "backstory" here perfectly. It's been "just around the corner" – for years – but never seems to take hold.
WPIII: But it's a new day for AI, isn't it…
The biggest driver of this technology is the growing acceptance of AI as a de facto "way of life" for tech firms. Not selling the technology itself but employing it in a way that touches everything yet allows it to run in the background. Really, AI is a great example of the "Convergence Economy" you and I have been talking about for years. You have better algorithms running on faster computer networks driven by more advanced chips, optical components, and what's known as "neural networks," computers that really can mimic the human brain by emulating synaptic connections.
So, as they say in the music industry, it's an overnight success after 20 years.
(Both men laugh.)
WPIII: That all sounds good (stops to laugh again). Sorry, that's funny…
Okay… okay… given the fact that this, too, is achieving reality: Is there a play you like here – either a direct play or a company with a "backdoor" connection?
MAR: You know, Bill, the single-best play here right now is yet stock my Nova-X Report readers hold. It's a firm that has pushed the cutting edge of tech for years with its ultrafast graphics processors. Turns out, these chips work great for AI applications because they deliver massive computing power in a small form factor. Just a few months back, it released a new processor that contains 15 billion transistors.
WPIII: If I remember correctly, that chip was designed specifically for AI applications.
MAR: You have a good memory – that's absolutely right. And what's great about this stock is that it has several other, similarly upbeat markets to sell to – including VR, including high-tech cars, including data centers. No wonder readers of Nova-X are sitting on gains of 241.3%.
The Safety Plays
WPIII: With all the Sturm und Drang about the election – and acts of Russian hacking – it seems that the cybersecurity mandate you and I have been talking about for years has finally reached true fruition. Why has there been such a "disconnect" between the obviously escalating demand for cyber-protection – and the poor performance of so many cybersecurity stocks? Is 2017 finally the year when there's a broad upturn in this sector?
MAR: That's a great point: There has been a "disconnect" between the cybersecurity needs of the world around us and the poor performance of some stocks in the field. Over the last five years, we've had a number of IPOs for the sector. To some extent, that has confused Wall Street, because many of these firms have very specific applications. Also, the transition from internal networks to the cloud has slowed down IT spending in general as network managers outsource. And that, too, has had an effect on cybersecurity sales. But the situation here is improving. Gartner had forecast slightly negative IT sales for 2016 after a 4.7% decline the year before. It now predicts IT spending as flat for the year. And a new survey by IT services firm TEKsystems Inc. found that nearly half of IT execs plan to increase their budget in the New Year.
WPIII: Is the incoming Trump administration a kind of "wild-card trigger" in this?
MAR: It is, it is – absolutely. President-elect Trump clearly sees cybersecurity as being critical to the defense of the nation – and in a more aggressive manner than we've seen under outgoing U.S. President Barack Obama. And don't underestimate the importance of cyber and infrastructure spending. A Kaspersky study found that 71 countries have 180,000 industrial control systems that hackers can access via the web. Every sector of the economy needs to advance security measures across the board to prevent possible attacks.
The fact is that we know that our lives are becoming increasingly "hackable." And it's not just the obvious things like our bank accounts, credit cards, or email accounts. The more of our lives – our "stuff" – that gets digitized, the more vulnerable we become.
WPIII: Just look at the Russian election scandal – and all the email hacks.
MAR: Exactly. And just think about where we head from here. Our health data is becoming digitized. Cars are becoming "connected." All this connectivity creates wonderful advantages and capabilities. But there's also a trade-off. Those new capabilities are accompanied by escalated risks. So, cyber safety is essential.
WPIII: A close relative to cybersecurity is defense. Under a Republican Trump administration, do you see bigger outlays on defense? What will be the key beneficiaries? Who do you like in this space?
MAR: I can't emphasize enough the impact Trump will have on defense – much as President Ronald Reagan did in the early 1980s. And that was spending that, by the way, helped trigger the breakup of the Soviet Union. I strongly believe that Mr. Trump looks at the U.S. military and sees a force whose manpower – and roster of ships, aircraft, and other hardware – has been depleted by two Gulf wars. He wants 60,000 new Army troops, 15 Marine battalions, 65 more ships, and 500 aircraft.
WPIII: So how does this influence the tech sector, and tech-focused investments?
MAR: This is great for tech, because our troops fight in what's known as Net-Centric battles. Basically, every soldier, sailor, tank, truck, drone, etc. is an "information node" that gives us a force-multiplier effect. In that digital approach, you can't have a beefier defense system without such key technologies as chips, sensors, software, cybersecurity, and secure tactical communications.
The Year Ahead for the "Gold of Tech"
WPIII: Fintech has taken some interesting paths in the past few years, with crowdfunding, new types of lending, and even Bitcoin and the blockchain. Is 2017 destined to be big for fintech – and specifically Bitcoin and blockchain?
MAR: More important than the rebound in the Bitcoin price that I was predicting for some time is the fact that the digital currency is becoming more mainstream. Ironically, it's more on the backend where the underlying technology – the blockchain – is emerging as a key tech platform, even beyond financial services.
IBM Corp. (NYSE: IBM) recently integrated blockchain into its Bluemix hybrid cloud platform. Among other things, it works for trade settlement, asset-tracking, and transfer and for the IoE.
On Wall Street, JPMorgan Chase & Co. (NYSE: JPM) is working on a new twist on the technology behind Bitcoin that would allow the bank to use a publicly available system for confidential transactions. That's a major endorsement for Bitcoin's enabling technology – as well as for the currency itself. Microsoft is using blockchain as part of its Azure cloud platform that targets 40 big banks.
We could even use blockchain for online voting because each transaction is unique, marked in a ledger, and hard to hack.
WPIII: So no more debates about how many folks may have voted "illegally."
MAR: Among other things.
WPIII: In some of our talks, you've actually cited some interesting – and specific – applications. Share a few of those here. And explain what the key takeaway is, if you could – you know, what folks should specifically be watching for.
MAR: Sure, Bill. Well, the main thing to watch here – I believe – is a continued adoption throughout the tech ecosystem. We just talked about IBM and its cloud-computing platform. As it signs up more customers, each of those will have access to blockchain in a managed service. And I'm looking for Microsoft to move from banking to the other industries it serves.
Remember, blockchain is already moving to other areas as well. Wal-Mart Stores Inc. (NYSE: WMT) is using blockchain to track pork in China. Here at home, the U.S. Department of Health and Human Services last July sponsored a competition to see how to integrate blockchain in a way that improves privacy, scalability, and privacy for health IT. So even the U.S. government sees this as breakthrough technology with enormous potential.
WPIII: Is this an investable realm? How should the retail investor tackle this?
MAR: For retail investors, there's not much to offer right now in terms of stocks they can trade on the open market. We do have dozens of startups working on virtually every aspect of blockchain technology. But I doubt we'll see many or any of them debut this year.
That means right now there is no pure play on blockchain. But retail investors can get into the overall space with the ARK Web x.0 ETF (NYSE Arca: ARKW). The ETF does have exposure to Bitcoin through an investment trust. And it's done well in 2016, up 13% year-to-date (at the time of this interview).
The "Comeback Kid"
WPIII: One of your more-interesting "calls" – and one that's probably contrarian to most of your brethren – is your prediction that 3D printing is destined for a "comeback." What's behind your prediction? What will drive that rebound? Why was it short-circuited in its rollout a few years back?
MAR: At this point in the cycle, it's all about industrial use. The 3D printing space got hammered back in 2014 because of the usual Wall Street hype.
WPIII: In other words, the usual offenders overpromised – and created a speculative frenzy of sorts?
MAR: Right. I mean, as veterans of this business, you and I have seen this over and over. Analysts and the other "usual suspects" convinced themselves – and hordes of investors to boot – that you'd soon see a 3D printer in every school, home, and small business. While that may happen someday, we are far from having an "invention garage" in every home. Unfortunately, all that hype launched a…
WPIII: Speculative frenzy…
MAR: Right, a speculative frenzy. Well, 3D printing stocks zoomed as a result – running up way beyond anything the underlying financials could support.
WPIII: And situations of that ilk can only end badly.
MAR: As this one did. But if we fast-forward two years to the present day, what's happening is quite interesting. Quietly – behind the scenes – industry has been gearing up to use 3D printing for rapid prototyping and additive manufacturing.
In fact, Bill, plenty of companies are employing this technology in very meaningful ways. For example, General Electric Co. (NYSE: GE) just offered $1.4 billion for two small firms with deep expertise in the enterprise market.
And big firms like The Boeing Co. (NYSE: BA) and Ford Motor Co. (NYSE: F) are finding they can produce prototypes they can build on the factory floor in what seems like minutes compared to what can take a year to accomplish. I haven't seen hard dollar numbers, but analysts expect aerospace 3D printing growth of 55% a year through the end of the decade. McKinsey says the overall field could be worth $495 billion by 2025.
WPIII: What do we need to watch to know if this is getting traction? How do we play this – especially to get ahead of the crowd?
MAR: While I like a couple of pure players in the space, right now they're not great for retail investors, because the stocks are choppy and better suited for swing traders with lots of time on their hands. The best exposure right now to the long-term upside is Autodesk Inc. (NASDAQ: ADSK). It's a "backdoor play" on the whole 3D sector… one that will let us ride this $1 trillion trend without suffering huge bumps along the way. Years ago, Autodesk blazed a trail in CAD software – and it's stayed at the forefront ever since. In fact, Autodesk is the globe's second-largest CAD software company and 22nd-largest software company overall. Whether it's a surgical tool, artificial aorta, fuel nozzle, or bike helmet, the firm's CAD software plays a role in it all. And that means 3D printing is a perfect fit.
WPIII: Let's talk chips – a key ingredient of all that lives and breathes as "tech." How does it look for the chip sector in the New Year? Are we talking about just chips – the "end" product? Or are we also talking about the chip making-equipment makers, too?
MAR: Both. Higher chip sales are great for companies that do testing and packaging – as well as those that sell the equipment needed to make the actual chips. So we're talking, as an example, about more sales of photolithography equipment – plus interconnected gear like diodes and switches, not to mention memory chips and the like. I'm looking for a modest bounce in the overall space – say, a sales increase of around 4% for the year globally. So stock selection will be key to making money on semiconductors next year.
The Rest of the Story
WPIII: Of those that we've talked about, which do you see as the biggest moneymakers in 2017?
MAR: To be honest, Bill, that's impossible to say right now. Each of the sectors we've discussed will do well this year. But they all will have big winners and losers. The trick is to have an investing guide who knows all the sectors and has a proven system for spotting the top gainers in any field. That's what I bring to the table here at Strategic Tech Investor – and at Nova-X Report. I've been an advisor to a dozen high-tech startups, served as a senior advisor to a Silicon Valley venture capital firm, and was on the front lines of defense tech during the Reagan Star Wars buildup.
WPIII: Is there another "wild card" that could emerge as a surprising moneymaker in the New Year?
MAR: Well, we haven't touched on what I call the Gigabahn Web Era. Right now, we're in the midst of a massive build-out for data centers. For the end user, we are moving to broadband speeds of 2 gigabits per second, compared with today's average speeds of about 50 megabits. Data centers are upgrading to 100 G, or 50 times faster than what homes and offices will receive. That's great for chips, memory systems, fiber optics, optical switches, and software-defined networks. It's all being driven by our digital world, both wired and wireless.
WPIII: Okay, let's go "broad" – and talk about your bigger view of things …
MAR: Sounds good, Bill.
WPIII: What are the one or two scenarios – or catalysts – that could yield an even better scenario that the one you've outlined here?
MAR: I'd start with a big one. If we do, indeed, get growth next year faster than Trump's 4% goal – well, that could really set things on fire. You already seeing multiyear highs for confidence among consumers and small businesses because they expect job growth and lower taxes. Remember, President Trump wants to repatriate tax dollars held overseas with a onetime levy of 10%. That could bring something like $750 billion back – just to the tech industry. And the administration's emphasis on U.S. production favors firms operating largely in the United States. That could be a boon to smaller tech firms that not only sell but also source here.
WPIII: Okay, conversely, what has you worried about 2017? In tech? In the U.S. or global economies?
MAR: Three things. First, currency values. If the U.S. dollar keeps gaining the way it has, it will make our exports less competitive and give overseas firms an advantage. Second, trade negotiations. Yes, we need more U.S.-based production, but if Congress is too aggressive with taxes or tariffs, well, that could spook Wall Street. Third is just basic market psychology. We haven't had a correction for some time, so there is always the possibility off a sell-off if investors decide it's time to grab profits and take a breather – particularly if the Federal Reserve is more aggressive at raising rates than what we've been expecting.
WPIII: What recommendations do you have for investors? Raising cash? Smaller gains? Split entries?
MAR: Actually, I think it's a bit of all three. I would definitely keep some money on the sidelines in case we get new buying opportunities. As for gains, all the easy money has pretty much been made. So, while three years ago I would wait for a "free trade," selling half once the stock has doubled, I would seriously consider taking profits when you're up 50% or 60%. Split entries are also a very good idea, because the strategy protects you from getting stopped out of a stock that turns weak only to rebound for even more gains. In fact, I often have my paid-up subscribers use the "Cowboy Split" split-entry system.
WPIII: Looking out beyond the New Year… what's your prognosis for tech over the next three years? Five years?
MAR: Continued growth. We are way past the tech tipping point. Do you know anyone who does not have a smartphone, broadband to the home, hi-def TV, a cloud account of some kind, and dozens of applications for the phone, laptop, and tablet? We're seeing smart homes, smart buildings, sensors, and chips deployed all over the world, and now the connected car. There's no going back.
And the Convergence Economy means continued adoption of all manner of tech into every part of our lives. My chiropractor just switched to online billing, and my barber uses a mobile-payments system. So just about every business and consumer in America has become a deeply embedded tech user. They are totally reliant on it – as is our entire infrastructure for that matter.
WPIII: Having gone thru this exercise, is there an overarching theme for tech in 2017? A tagline?
MAR: The "Year of Tech Leadership." You wouldn't know it from the Nova-X Portfolio, but tech as a group slightly lagged the broad market last year. The S&P 500 gained 12.8%, while the tech-centric Nasdaq Composite surged 11.4%, largely because life-sciences stocks were so hard-hit going into the election. I'm looking for tech as a group to beat the market next year by at least 15%, and if you pick the right stocks… by an even greater percentage.
WPIII: Thanks, Michael…
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The post These Tech Plays Are "Ready for Prime Time" in 2017 appeared first on Strategic Tech Investor | Michael A. Robinson.
About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.