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I have talked about ways to make money in tech stocks in spite of being a value-conscious investor.
Much of the time, the leading tech stocks trade at nosebleed multiples, making it very difficult for those who can add and subtract correctly – with maybe a little multiplication thrown in – to find and own a company that's worth anything close to the price of its shares.
It's been an issue for every value-oriented investor I've ever met and continues to be one today.
I've shown you that tech stocks at less than 12 times free cash flow and tech stocks that have high dividends can be winning strategies.
The problem is that there are not very many at any given moment of time to fill a portfolio.
Today, I'm going to give you another technique that you can add to the mix and put more technology to your portfolio…
Filter Out the Noise
In order to knock the ball out of the park with tech stocks, we have to put on our deal-making hats.
At the same time, we'll have to do it without playing a rousing game of "pass the burning match" on stocks that have great stories and dubious valuations.
The folks who make the big money in tech are the founders and the dealmakers, not those trying to trade stocks with a popular story.
I am not (and probably will never be) the founder of a tech company, but I am pretty good at understanding dealmakers and how they view the world.
So I took the dealmaker's view of the world and applied it to tech stocks, the results were very exciting and wildly profitable.
I started with the universe of tech stocks and reduced to just those that produced cash flow.
I then narrowed that list down to only those companies trading at an enterprise to earnings before interest and taxes that was roughly 70% of the long-term average enterprise multiple of tech stocks going back to 1995.
Next, I took that shortlist, ran it through my credit and conditions checklist, and only bought those that passed at least two-thirds of the checklist criteria.
At any given time, you only want to own the strongest companies at the lowest valuations.
Using this formula, check your portfolio every month to eliminate those companies that started losing money or showing a decline in credit and financial conditions.
On average, over the last 20 years, there have been about 17 of these stocks in the portfolio at any given time…
But it should come as no shock to anyone that right now, there are only three new names in the tech dealmaker portfolio.
Tech stocks have been on a tear for several years now, and the dealmakers have been even stronger.
A look at the data tells me that there is no information to be had when the number of stocks is lower than average.
Dealmaker stocks have done well when there are just a handful of stocks, so we should just go ahead and buy what we find.
That's the beauty of using a quantitative approach to managing our portfolio.
It keeps us from overthinking once all the heavy lifting and testing is done before we started.
Three Dealmakers to Add
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of "Max Wealth" and Heatseekers.