Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Investing in the Technology Sector Stocks

Stock-Markets / Tech Stocks Oct 30, 2007 - 08:42 PM GMT

By: Hans_Wagner

Stock-Markets Best Financial Markets Analysis ArticleTo beat the market investors need to be in the right sector and sub-sector. Money in markets tends to flow from one sector to another based on investors perceptions of what is fundamentally driving the underlying business. The basic theory behind sector rotation was described by Stan Stovell in Standard & Poor's Guide to Sector Investing 1995 (this is an expensive book). However, as I have discussed in previous articles on sector rotation, the movement of money is a bit more complex and not quite as straight forward. In this article I present a couple of the underlying themes that are driving the technology sector to help identify investing opportunities.


Using themes to identify new sectors

The investing theme should be clear and simple since there only a couple of key factors that determine the trend for the sector. Most of the time it involves what is driving the supply and demand for the products or services within the sector. For example in the energy sector the demand for oil throughout the world is growing as emerging economies grow rapidly and create new demands for energy. The available supply will become more expensive to find and new alternatives will be needed to keep up with the demand. From this overall theme, you can then focus on each sub-sector to assess where the best opportunities will lie.

Continuing the example, the need for new supply will drive up the demand for those companies that can contribute to the exploration and development process for oil. This means the oil services companies should benefit. Three years ago the Oil services Holders (OIH) was trading in the 90 to 100 range. Recently it reached 200. A very nice return if one had identified and followed the theme.

When you are creating your theme, or borrowing from one's you have heard and like, be sure to look up and down the “supply chain” of the sector. You might be surprised by what you find, even in a different sector. For example drilling deeper for oil requires newer and better pumps and valves. Flowserve (FLS) designs and produces pumps and valves for the energy industry as well as others. It is classified in the Industrial sector, yet it benefits from the search for oil.

Technology Sector

The technology sector has been undergoing a long period of consolidation after the dotcom bubble of 2000. However within the sector a number of interesting changes have been taking place that are of interest to investors. 

Probably of most importance is the performance of the semiconductors relative to the overall market. It seems that we are seeing a definite slowing in the growth of this important segment, possibly due to the commodity nature of the industry. For example, Nokia recently changed its chipset strategy to focus only on model chips. It intends to leverage the capabilities of other semiconductor companies. Nokia believes that there are better returns in software and services. The consolidation of the semiconductor industry is inevitable in order for the capital intensive industry to survive. This tells me that the semiconductors companies are becoming like commodity suppliers. This will cause a transition in the industry that will take some time to complete, resulting in slower growth until the changeover is complete. 

The example below from stockcharts.com describes quite well the divergence that is taking place between the internet companies ($MOX index) and the semiconductors ($SOX index). It confirms that investors are still not valuing semiconductor companies as they lack the pricing power that the internet companies have.

Other changes that are more relevant to the development of our themes include:

  • Wireless and mobility devices continues their rapid growth, as new devices continue to expand their functionality and the younger generation is no longer tethered to the wireline telephone;
  • Broadband and especially video is becoming an essential part of networks from the internet both wired and wireless;
  • Security grows in importance as the internet becomes a primary way of doing business; and
  • Applications are making software the most important part of the technology value chain.

Themes and Potential Companies

Each of the changes mentioned above represent potential investing themes. They describe a business situation with growing demand for a product or service. In addition they are fairly easy to understand and follow. Assuming you accept them as potential investing themes, all that is left is to identify companies that should benefit.

Wireless devices continue to grow in demand as broad band capabilities are extending to the devices with the roll out of third generation (3G) capabilities are made available at quite good prices for customers. Well known companies such as Nokia (NOK) and Research In Motion Ltd (RIMM) have benefited greatly, while Motorola (MOT) has encountered difficulties, though a turn around may be underway. Apple (AAPL) has entered the fray with the iPhone. Then there are the companies that are benefiting from the benefits from global positioning such as Garmin (GRMN) and Trimble Navigation (TRMB).

In the broadband and upgrade of the internet we see a number of companies that should benefit. Motorola (MOT), Cisco Systems (CSCO) Juniper Networks (JNPR) and Harris Corporation (HRS) are some of the companies that have a stake in the upgrades to the capabilities of the internet that are currently underway.

Security remains a significant concern to all who use their personal computing devices. Blue Coat (BCSI) is a relative new member to this arena that includes Symantec (SYMC) and McAfee (MFE) among others. 

There are many software application providers but an interesting play is Akamai (AKAM), a company that helps firms to manage and distribute the applications across the corporate network.

The point of this review is not to recommend specific companies for investors to consider, but rather to emphasize that they need to have a clear and simple statement that describes the investment concept before committing their hard earned capital. 

The Bottom Line

Each sector in the market has a set of relevant themes that can be developed to help investors to articulate their view of the opportunity. As markets evolve over time it prudent to consider the sectors that deserve the most attention and your capital. Developing a theme that describes the investment opportunity in clear and simple ways is an important part of any sector analysis. Then it can be used to help find the best companies can take advantage of the theme. 

When developing the theme for the sector, be sure you look at the risks that are inherent with the theme. These risks might the trigger you need to know when to sell, reduce your position, or switch to another sector or sub-sector. For example, if the price of oil gets to high it is in danger of causing the economies of the world to slow down, possibly causing a recession. Periodicals like Barron's. usually present interesting factors to consider when evaluating sector themes.

 

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Hans Wagner Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules