If you want growth and returns, there’s
no better stock sector than tech.
The technology companies in the S&P 500 have
doubled the market return over the last five
years and it may just be getting started!
In this video, I’ll show you how to find
the best tech stocks to buy then reveal the
top five stocks for your portfolio.
We’re talking top tech stocks to buy today
on Let’s Talk Money!
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Let's Talk Money.
Hey Bowtie Nation, Joseph Hogue with the Let’s
Talk Money channel.
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thank you for spending a part of your day
here.
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We’re starting a great series of videos
today, an idea straight out of a suggestion
from one of you in the bow-tie nation.
Over 11 episodes, we’ll be looking at the
best stocks to buy but doing it in a way that’s
not only going to grow your portfolio but
protect it as well.
Now those of you in the nation have heard
me say how important it is to pick stocks
from each sector of the economy.
We’re talking stocks from energy companies,
tech, consumer goods and so on.
Too many investors get excited about one specific
sector like that growth in tech or the dividends
in consumer staples, they plow all their money
into stocks in just a couple of sectors and
get absolutely destroyed in the next bear
market.
A lot of times, you may not even realize it’s
happening until it’s too late.
You might be screening for dividend stocks
to buy.
You narrow your list and invest, but by virtue
of limiting your picks to the top dividend
stocks, you might also be limiting your portfolio
to those sectors that pay the highest dividends.
This is supremely important and I can’t
believe we haven’t covered yet on the channel.
Over these 11 episodes, one for each stock
sector, I’ll show you how to pick the best
of breed in each.
We’ll look at some of the big trends and
how to pick stocks to buy, then I’ll reveal
my five favorite stocks in each.
Now understand, you don’t necessarily need
all five stocks in all 11 sectors for a great
portfolio.
I would recommend putting at least two or
three stocks from each sector into your portfolio.
I’m also going to show you a couple of exchange
traded funds you can buy to get broad exposure
to the sectors and share the simple strategy
I use to get market returns plus a few extra
percent every single year.
So let’s get started because I’m excited
to talk tech with you.
If you’re coming in later to the series,
I’ll link in the first comment below the
video to the most recent video.
I’ll also be linking in the video description,
all the videos in the series so you can see
all the stocks for each sector.
If you’re coming in later, will link up
the other videos in the series in the first
comment.
If you don’t go with any of the stocks in
a sector, consider a position in one of the
sector funds to get that exposure.
Here’s that graphic again of the stock sectors
and today we’ll be looking at tech including
semiconductors, software, storage and internet
companies.
Picking these five tech stocks to buy, I screened
for a lot of the fundamentals we’ve talked
about on the channel.
I screened for companies with increasing revenue
and cash flow over the last few years.
With the economy growing, this was most companies
but it did screen out a few losers in downward
trends.
Another factor I looked for, and all of you
in the bowtie nation are probably tired of
hearing me talk about this one is the operating
margin.
If there is one single factor you look for
in picking stocks, it should be the operating
margin.
This is the operating income divided by the
total sales for a company over the period,
usually three months or a year.
So if we look at the income statement here,
we see sales or revenue at the top with $259
billion for Apple.
After the cost of goods or materials, the
statement deducts the costs of running the
company, these operating costs.
Now what you get after removing the costs
of running the business; marketing, administration,
all these costs, is the operating profit,
this $64.4 billion for Apple.
It’s the truest and best measure for management’s
ability of creating a profit from the business.
And when you take that operating profit divided
by the sales number, you get a profit percentage
for how efficient and effective the business
is.
The pundits and financial media like to talk
about the bottom-line earnings and the profit
margin.
Don’t look at that.
The earnings includes the effect of debt and
financial leverage as well as accounting tricks
on taxes.
Analysts look at this operating margin as
the real measure of management’s success.
When you compare this operating profitability
across companies in the same sector and industry,
you see which are best run and have those
competitive advantages.
I also screened for a positive dividend yield
and this is one where a lot of tech investors
will disagree.
As growth companies, a lot of tech stocks
aren’t going to pay dividends.
The company is reinvesting every dime for
that faster growth and that’s fine, I just
like getting a cash return on my investments.
I like the cash discipline on management from
a dividend.
Management can’t throw cash at worthless
acquisitions and low-return projects because
it has to meet that dividend.
But this is probably one you can leave out
if you like and I made an exception for two
of our tech stocks.
You’ll open up the list to all those companies
that don’t pay a dividend and will still
find some solid investments.
Beyond that fundamental analysis when picking
these tech stocks, I looked for companies
with a competitive advantage and catalysts
for growth.
The truth is, the market already knows which
companies have faster revenue growth, which
have higher operating margins and all that
is mostly baked into the current price.
It’s the competitive advantages and those
catalysts that offer the real opportunity
for long-term return.
These are the companies with pricing advantages,
brand advantages and upcoming events that
can really boost their stock price.
I’ll share those five tech stocks I found
next but first I want to highlight three tech
funds you might also consider.
If you can’t find stocks you really like,
so if no stocks fit your screening, you might
consider putting some money into these funds
just to get that exposure to tech investing.
Then you can invest in stocks of other sectors
like we’ll talk about in the series but
still have some of that faster growth from
tech.
Our first tech fund is the Technology Select
Sector SPDR, ticker XLK.
This holds shares of 68 of the largest tech
companies based in the U.S. and is pretty
well diversified across all the separate industries.
Companies in the fund have an average market
cap of half a billion dollars so we’re talking
the largest like Microsoft, Apple and Intel.
The fund charges an expense ratio of 0.13%
which is extremely low and pays a 1.25% dividend
yield.
While that XLK will give you broad exposure
across tech stocks, this next one is more
focused in one of the biggest tech themes
right now.
The Global X Cloud Computing ETF, ticker CLOU,
holds shares of 36 companies offering cloud
services and positioned to take advantage
of the theme.
These companies are quite a bit smaller with
an average size of $100 billion and some are
based outside the U.S. so you get some international
exposure here.
Understand that the expense ratio, that’s
the money that gets deducted out of assets
each year to pay the portfolio management,
that’s 0.68% a year so quite a bit higher
but the idea is that these stocks are going
to grow faster than the broader tech space
as well.
The last fund here before we get to those
five tech stocks to buy is the Global X Internet
of Things ETF, ticker SNSR, and this one invests
in all the companies positioned to take advantage
of WiFi, 5G and fiber optics.
This is going to be a huge trend over the
next ten years but I feel like it’s a little
less well defined compared to maybe that cloud
fund or other themes.
Here you’ve got 50 companies spread across
semiconductors, software, hardware, telecom…really
across all of tech.
These are smaller companies with an average
market cap of only $26 billion but still established
companies.
The fund is also on the expensive side with
that 0.68% expense ratio but could more than
make up for it in growth.
Even if you do invest in a few tech stocks
like the ones I’ll highlight now, you might
still consider putting money in some of these
funds.
That’s going to give you the opportunity
for higher returns from that individual stock
pick but also spread your money out a little
across the hundreds of companies in the fund.
Our first couple of tech stocks will come
as no surprise and are really bellwethers
in the space.
We start with Intel Corporation, ticker INTC,
and its 2.24% dividend.
Despite a really competitive market for semiconductors,
Intel has been able to consistently beat expectations.
For example, even with PC volumes down 10%
on a year-over-year basis in the third quarter,
the company reported sales that were $1.2
billion over earlier guidance.
A lot of the strength was on a higher sales
price with prices higher by three or four
percent across products.
And what this means to me, in a really competitive
market, is the power of Intel’s brand and
competitive advantages, that it’s able to
drive that kind of pricing power.
Shares are trading around 12-times earnings
which are expected flat over the next year
but you can see how management has consistently
and easily beaten expectations.
The board has increased the share buyback
program to $20 billion over the next 18 months
so that will drive earnings per share.
Intel will benefit from both the cloud computing
and internet of things themes and I think
this is where the big upside surprises could
come from in the next several years.
The average analyst price target on Intel
is the widest we’ll see in the tech stock
group with a high of $70 and a low of $42
per share.
Most of the analysts are grouped right around
$60 to $65 a share despite this range.
I think the shares could easily go north of
$60 each with earnings around $4.98 per share
which is about 7% higher than expectations.
Add that 9% price growth to a 2%+ dividend
and you’ve got a solid double-digit return
here.
Our next tech pick is one of the biggest,
trillion-dollar Microsoft, ticker MSFT, and
it’s 1.4% dividend yield.
Microsoft is quite a bit more expensive than
I usually like to buy but just got a huge
boost with the Pentagon’s $10 billion cloud
computing contract.
The company’s Azure cloud platform was already
its big growth driver but this contract is
absolutely huge.
It’s not so much the size of the contract
but the fact that this is probably going to
open up a wave of federal and state cloud
contracts for the company, none of which are
priced into the shares yet.
Now of course, Amazon will contest the Pentagon
contract in courts and might have a decent
case but it’s doubtful this one gets overturned.
The rumors are that President Trump sought
to influence the Pentagon’s decision because
Amazon’s founder Jeff Bezos also owns the
Washington Post.
It’s going to be tough to prove and even
if there is some evidence here, I think Microsoft
still comes out with the contract.
Microsoft’s cloud business also landed a
$1.8 billion contract from the Department
of Defense this year and a $2 billion contract
from AT&T with CEO Nadella saying he has a
line of sight to many more such deals.
The shares are expensive at 28-times earnings
but profits are expected to jump 10% over
the next year and, just like Intel, you can
see how management is consistently beating
expectations.
I actually think earnings could top $6 a share
over the next year and just keep going from
there.
Microsoft is one of the most widely followed
tech stocks among analysts and price targets
are in a really narrow range here.
The lowest target at $155 a share is just
over 8% higher than the current price while
the top target of $170 per share is almost
20% higher.
I did a video highlighting Microsoft in August
with a buy recommendation.
The shares are up 8% from there and I like
that $160 to $170 range for the shares.
Probably the biggest surprise pick and one
nobody is watching is Logitech International,
ticker LOGI.
Logitech is a Swiss maker of computer and
mobile accessories and I think could potentially
be an acquisition target eventually.
The company makes some of the most popular
accessories in the industry.
I’ve got two of their products on my desk
right now, the Yeti microphone and the c920
webcam which are pretty much both the defacto
used by everyone in the blogging and podcasting
space.
Logitech recently acquired Streamlabs, again
the standout leader in its space for video
streaming.
So here you’ve got a company leading in
its product categories, growing sales and
cash flows by double-digits consistently and
has a pristine balance sheet with no debt
and half a billion in cash…that’s a recipe
for some larger player to come and buy it
out.
The company is just under $7 billion market
cap so this would be an easy buy for so many
in the tech space.
Shares are trading at just under 20-times
earnings which are expected 4% higher over
the next four quarters but this stock isn’t
widely covered by analysts.
With solid consumption in gaming and its other
core products, I think earnings could come
out around $2.35 per share or higher.
We’ve got just three ranked analysts with
targets on Logitech so take this with a grain
of salt but that low target is around $36
per share with a high target of $58 per share.
I like the growth potential on this one and
there’s a good chance we see a big pop someday
on a buyout offer.
Now I’ve got two tech stocks that a lot
of investors are going to argue with but I
truly believe these are the stocks of the
future.
Our first one is Alibaba Group, ticker BABA,
which is the Amazon of China.
Between all the sites owned by Alibaba, it
has almost a monopoly control in Chines online
consumption and it’s using the massive data
it collects to become a data powerhouse as
well.
To give you an idea of scale here, just two
of the company’s retail platforms, Taobao
and Tmall, generated upwards of $909 billion
in merchandise sales last year, more than
Amazon and eBay combined!
Alibaba is spreading globally much more effectively
than Amazon has been able to do, especially
across Asia, and the company’s cloud platform
has a distinct advantage over Amazon’s AWS
or Microsoft’s Azure in China.
Shares of Alibaba trade for 28-times earnings,
the data here is in Chinese Yuan so converted
earnings are around $6.26 per share, but compare
that to Amazon’s stock price of 78-times
earnings and Alibaba is a steal.
Earnings are expected 19% higher over the
next year and this one has decades of growth
ahead of it.
Alibaba is widely covered by analysts with
a low target of $207 and a high of $250 per
share for upwards of 42% return from the current
price.
This is a long-term must own in my book so
if you’re bummed about not being able to
buy a share of Amazon for $1,800 each then
pick up Alibaba here and wait for it to reach
that price.
If Alibaba is the Amazon of China then our
next tech pick, Baidu, ticker BIDU, is the
Google of the world’s second largest economy.
I love these two China plays because they
are the mirror twins of Amazon and Google.
Baidu dominates search traffic in China, just
like Google, it’s made investments in AI
and self-driving, it’s got an online video
platform just like YouTube.
It’s basically just copying one of the most
successful businesses in history and doing
it in what could soon be the largest economy
in the world.
Shares of Baidu trade for 15.6-times earnings,
again this is shown in Chinese Yuan, and even
though earnings are expected lower next year
on some divestitures, management has beaten
expectations by an 37% on average over the
last eight quarters.
Again, take that winning business model, apply
it to the Chinese growth story and get it
for 15-times earnings versus a cost of 27-times
earnings for shares of Google.
I think this is another one you can add to
your long-term retirement plan and be very
happy.
Analyst targets range from $108 per share
on the low side to $181 per share over the
next year and growth here is really over the
next decade or better.
Click on the video to the right for the latest
update to our dividend portfolio challenge.
This group of dividend stocks is beating the
market and producing a cash yield double what
the index is paying.
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