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Investing in technology stocks

, October 20, 2014, 0 Comments

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When we buy starbucks coffee we are familiar with the taste,aroma, temperature, state and often fairly why we are spending money. Hence buying a consumer staple company stocks you know what are you investing in. While investing in technology stocks many of these parameters are uncertain or tested over handful of scenarios.

Consumer is the king anyways who will decide whether or not productivity increased or a lab dream will be a short lived reality. Many ground rules written for stock in general for past decades do not hold true for technology stocks. If you are investing in technology stocks be aware of pit falls which may apply only to this sector.

In this article I am attempting to shake some of the rules meant for stocks in general, with few examples in tech sector. Cases covered might not be exhaustive but in general provide good guidance in avoiding pitfalls and gaining maximum benefit out of your money. Hope you will have an engaging read.

Stocks are long term investments, even technology stocks?

From long term perspective stocks outperform bonds. One needs to consider the investment time period and be sensitive to any drastic changes in demand and supply of product, competitors or market behaviour. Staple food products like CocaCola might not undergo any significant change in demand over years, a chemical company manufacturing paints/dyes can go on for ages. The same can’t be blanketed for a technology company.

The pace at which landscape changes is phenomenal. Any portfolio exposed to technology sector needs to be reevaluated every three months or even earlier if any event hits the company hard. However few firms are showing that they are really meant for long term and can often keep beating the competition.

Apple Inc. offering suite of products boasting perfect harmony of hardware and software is indeed an outlier. an intelligent investor will avoid short-term volatility for such firms and hold it for long term. Much is dependent on the research and development effort put by the firm, which will chalk out further strategy of the firm. Even if such firms put a halt to publicizing their new developments strategy might be working just fine to put the competition play down.

Don’t be afraid of small cap but know when to exit

Omni Vision Technologies (OVTI) is a leading developer of advanced digital imaging solutions. Its award-winning CMOS imaging technology enables superior image quality in many of today’s consumer and commercial applications, including mobile phones, notebooks, tablets and webcams, entertainment devices, security and surveillance systems, digital still and video cameras, automotive and medical imaging systems.

With a Market cap of USD 1.5 billion is not actively covered research analysts. An investor deeply interested inTech investing would how ever go further in finding out the products and demand in the market. With 18 USD per share in early 2014, firm was offered 29 USD per share by Hua Capital Management a Beijing based investment company. Since then price has not crossed this resistance point, precisely time to get out of the stock.

Legal is lethal

Almost any tech stocks you research, think of investing look for the issues for privacy, legal, circumventing tax issues probably with higher weight age than actual product demand and it’s competition. Due to uniqueness, out of the box, never thought of products or services, market might be more focused on enjoying the new toy in baby’s hand. Issues with the firm might be hidden for long unless surfaced after regulatory bodies start voicing out.

Recent example of Google Inc, exposed to using Double Irish taxation might not have been well received by market. As a strategy for limiting taxes, the Double Irish method is “very common at the moment, particularly with companies with intellectual property,” however Google states that “Google’s practices are very similar to those at countless other global companies operating across a wide range of industries,”.

Mathematically there might be nothing wrong, but amidst missing market consensus earnings this could not be favorable for stocks. if you are not a long term investor, take the brunt and venture on to some thing else, unless you hear something very concrete from Google Inc.

Don’t pay too much attention on short term volatility

As a technology investor, you might be always tempted to look at new path breaking technologies and diver some of your funds to risky ventures. Big data is much talked about since 2 years but still in race to prove that next big thing is here. Put simply if searching any text in google is simple, Big Data is taking this search to next level, where intelligent search could be applied to squeeze out information no body had ever looked at it yet.

One firm in this space called Splunk Inc, was awarded as the most innovative US company for the year 2014. Firm’s free cash-flow to equity is slightly positive but return on equity is still negative. With mere 1000 employees as of date, firm is trying to get the product known to the world and at the same time embarking to reach a point where business accepts funding for such products.

Splunk was darling in early 2014 and kept soaring since early 2013. In mid 2014, stock took a beating as huge blocks of shares were unloaded by then leaving marketing chief. Internal disputes would have led to c-suite officers to quit and exercise their holdings in the firm. Shares retreated from high of 100 USD back to as low as45 USD.

However, hang on there, if strategy of the firm is right and management understands what they are into, it might be worth holding the stock than quitting at wrong time.