by James McCrodan, The McCrodan Group –
Technology; the term itself can strike fear into the hearts of ordinary people at its mere mention. Even though it has brought us everyday convenience, productivity and wondrous amusement, it has also brought us heightened anxiety, confusion and downright fear when the console on the new washing machine looks more complicated than the dash in a 747. However, technology is everywhere and spreading. It’s the fastest-growing sector in terms of revenue generation and job creation globally. As such, it has a place in any quality portfolio. The question is how best to tailor your participation in this sector to suit your objectives and risk tolerance.
When investors think of technology, they think of the FANG stocks (Facebook, Amazon, Netflix, Google) plus Apple. By far these are the best known names as their products and services play a part in most of our lives on a daily basis. So why shouldn’t we invest? Well, the short answer is we should, but let’s understand the risks before making any moves.
Everybody knows Netflix and Amazon. We binge watch wonderful shows on the great home theatre we bought online through Amazon. Both have great products and services. Heck, what could go wrong? Well, both Amazon and Netflix trade currently at over 240 times earnings. For perspective, Apple trades at just under 18 times earnings. Expectations for growth for Netflix and Amazon are very, very high. Their debt levels are very high. Their balance sheets are structured for aggressive growth. Apple, on the other hand, is a much larger company with a lower rate of leverage. While Apple’s rate of growth will be slower, the potential downside risk for the investor is also lower. Google (now Alphabet) also trades at a much lower multiple of 27.5 times earnings. Google is about half the size of Apple, but its balance sheet is even higher quality with a much lower level of debt. Are Apple and Google better investments than Amazon and Netflix? It all depends on your objectives and risk tolerance as well as the future performance of the respective companies. Make your choices with capital preservation in mind.
If you can’t decide what to own but you want to participate, there’s always the ETF alternative. Most major ETF providers offer sector funds for technology. Some will even offer sub-sectors. If you decide to go this route, check out the trading history of the ETF candidates. Make sure there’s ample daily liquidity and that the embedded management expense ratio is reasonable.
Best of luck, and if anyone knows how to program a delicate cycle … send me a note at email@example.com.