Tech stocks have been among the best performing stocks over the last several years. That trend is likely to continue for the foreseeable future. But the simple fact is that there are a handful of stocks that have dramatically outperformed the market while many names underperform.
Sector rotations in and out of microchips, software and hardware names send investors running for the hills. The volatility is hard to stomach for longer-term investors, let alone traders. Still, the sector spawns new hope of the next big thing or an emerging cash cow.
More recently, this market has flashed confusing signals. As we prepare to look at which tech stocks have the best chances for future success, we have to look at some of the recent moves that have investors guessing which way the market will go.
We often see earnings season characterized by profit-taking near the top and a lack of bullish conviction. If the bulls wanted to chase stocks higher, then new highs would have been a near-daily occurrence, and when that happens the bears are crying bloody murder on a daily basis.
When we think of tech stocks, of course FANG comes to mind. In terms of recent earnings performance we often see a mixed bag from that select group. Netflix subscribers issues and Facebook advertisers issues are important to the whole tech ecosystem.
Alphabet and Twitter have also seen solid earnings results that help send shares soaring. There are also dozens of smaller tech stocks that consistently post good quarterly reports and give bullish outlooks.
While big cap tech gets a lot of the headlines, it’s the smaller stocks that can sometimes produce the biggest surprises.
Importance of Earnings
Earnings are what drive stocks. Yes, the charts and timing all play a role in what happens, but at the end of the day it is all about the earnings. We at Zacks have developed a system to tell us which stocks are seeing the best earnings estimate revisions. The Zacks Rank looks at the estimate changes from all the major brokerages, but the devil is in the details. To find the truly best stocks, you have to do some more homework.
Where Growth Is Great
Different types of growth are valued differently. This concept suggests that only the best type of growth is worth investing in. The recent swings in the market tell me that investors are really interested in the growth from only certain tech names.
Stocks with pricing power have seen stronger moves higher than those without. Demand is still very strong across the board, but that pricing power can help the company expand margins, and those fatter margins lead to larger profits.
More . . .
Will These Be the Next Facebooks and Amazons?
A small number of "under the radar" tech companies appear poised for exceptional growth. These innovators are at the forefront of emerging trends that are changing the world. They could very well be THE big name tech stocks of tomorrow.
Zacks is targeting exceptional gains from these stocks over the long term and you're invited to access these exclusive recommendations.
Special opportunity ends Sunday, December 27.
See Stocks Now >>
We really start to see the impact of pricing power and strong demand when tech firms are more fully addressing the higher end of the customer base they serve. Sometimes we see this in the growth in the subscriber base, but mostly we see an increase in margins and that also sends EPS higher as well.
Be Conscious of the Comps
Pricing power and addressing the higher end may not be enough to ensure that you have found a lasting investment in the tech space. It’s always wise to look back and gain some perspective as to how strong (or weak) a recent quarter was. Putting that growth or weakness into perspective can help you set the proper goals or limits for your investments.
Strong performances in the past can lead to challenging headlines in the future. If there was significant growth 3 quarters ago, there could be headline risk in your tech stock… meaning that it might not be able to live up to the performance from a year ago.
Conversely, weak reports from the past have a way of being a tailwind in the future. They will present some easy comparisons in the coming quarters, so there could be some low bars for management to easily hurdle. Those numbers might also keep some analysts from getting too aggressive with their estimates. Finding good stocks that have the potential to see a breakout quarter is critical to success.
How to Get Started
Over the last several years, many of the biggest gains have been in tech. It looks like that trend will continue thanks to heavy industrial demand, consumer spending and new innovations in the tech space.
To help you target promising tech stocks that are poised for exceptional profits, I invite you to join the investors following my trades in Zacks Technology Innovators portfolio.
We look beyond the Facebooks, Amazons and Googles to find under-the-radar companies that are creating the world of tomorrow now. Our goal is double- and triple-digit long-term gains.
But we'll also take advantage of opportunities for shorter-term profit. We recently closed gains of +46.8%, +66.5% and +73.1% in as little as 2 months. ¹
Now is an ideal time to check out Technology Innovators. With trillions of dollars pouring into emerging tech like 5G, the Internet of Things, electric cars and more, the upside is tremendous. Investors who get into the right stocks before the masses stand to see the greatest returns.
When you look into Technology Innovators, you’ll also gain access to our new Special Report, Electric Vehicles: Profiting from the Wave of the Future. It spotlights 6 tickers our experts believe could see massive gains in this fast-growing industry – including 3 little-known “upstarts” with the potential to become dominant players in the field.
Don’t delay. Your chance to check out Technology Innovators and download Electric Vehicles: Profiting from the Wave of the Future ends Sunday, December 27.
Look into Zacks Technology Innovators now >>
Aggressive Growth Strategist
Brian Bolan is our aggressive growth expert and the editor of the Zacks Technology Innovators portfolio.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Zacks Investment Research