11/22/2011 2:55 PM ET|
Are tech stocks the new safe haven?
Security-seeking investors like Warren Buffett used to turn to the makers of necessities like toothpaste and soap. Here are 5 tech stocks that appear to offer safety now.
Are computer chips and software code now as safe as shampoo and laundry detergent?
After all, these companies get dependable revenue by selling stuff people keep buying even during hard times -- like baby shampoo, Crest toothpaste and Tide detergent. In fact, this "recurring revenue" is a big reason these two companies are major positions for Berkshire Hathaway (BRK.B, news).
But tech stocks? If you've ever lost money in roller-coaster technology stocks, you might not think of them as safe havens.
It's time to rethink that.
As the Oracle of Omaha's move into IBM and Intel suggests, many tech companies are actually as "defensive" as businesses selling paper towels and razor blades. In short, they provide stability in a volatile market, with the potential for decent upside because they sell products that companies and consumers need.
Buffett is not the only one who thinks so.
At a presentation in New York City last week, James Swanson, the chief investment strategist at MFS Investment Management, made the case for investing in tech as a defensive move to cope with the market and economic uncertainty that 2012 will surely bring. "We always thought of technology as highly charged, but the tech sector is much more defensive than it used to be," says Swanson.
That's because a lot of tech companies boast qualities that make them safe, says Swanson. First, they have financial strength based on dependable cash flows, solid profit margins, built-in recurring revenue and lots of cash. Next, they have a global reach, which eliminates exposure to any one country's business cycle. And many even have arguably cheap valuations, which may protect against declines during market sell-offs.
All of this brings relatively low volatility -- a nice quality when wild weekly market swings bring stress.
In contrast, many of the traditional "defensive" plays in health care and basic consumer goods face uncertainties like questions about government's role in health care and sharp commodity price swings, says Swanson.
The right techs for safety
Of course, not just any tech company can provide safety in a storm. A new startup with a hot product can flame out fast or tank on an earnings miss. For safety, with the potential for growth, you have to look among the tried-and-true tech survivors, or the tech "dinosaurs," as Todd Lowenstein, portfolio manager of the HighMark Value Momentum (HMVMX) fund, calls them. By that, he means the bigger tech companies like IBM and Intel that survived the tech bubble and continue to serve established markets.
The tech dinosaurs are often viewed as has-beens. "There is the perception that they will not participate in the next trend," says Lowenstein. These dinosaurs, however, typically have entrenched positions in their markets that allow them to produce solid profits and cash flows. And, as we will see, many of them are participating in some hot trends, so there's the potential for decent growth, too.
Besides IBM and Intel, I'll put EMC (EMC, news), a storage company, on a short list of "defensive" tech plays, as well as Cognizant Technology Solutions Cognizant Technology Solutions (CTSH, news), which provides software development, maintenance and testing services. I'm also including Apple (AAPL, news). It's not really a dinosaur, of course, but the stock looks cheap, and it has many of the other characteristics of defensive tech plays.
Let's take a look.
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Tech stocks...really! This is the way out? Are there not more pressing things to be addressed. Europe is collapsing under insurmountable debt and two dictators have been installed in place of elected officials. Housing continues to fall. The stupid committee could not agree to cut 1.2 trillion (peanuts) over a TEN YEAR period on a debt that is currently 15 TRILLION. Bernanke is echoing thoughts of QE3, another round of make believe stimulus to borrow more from the dwindling tax payers to pay the interest on what already has been borrowed. How has this worked so far? Corrupt politicians, captured media, an attorney general that refuses to prosecute a fraudulent banking system and there is so much more, but people seem to be happy watching NFL and Dancing with the Stars. I think some real honest talk on how to prepare one's self for the 2nd great depression would be in order.
iowaview; It's not a left, right thing, both parties are money whores and both are owned by the lobbiests and banking cartels. The key would be to separate the money from the politics (not an easy task, but doable). Once you get rid of the central bankers the system could work again. We've become a government for the banks, by the banks and of the banks.The Federal Reserve is the cancer that just keeps on growing.
Doug: can't argue with what you pointed out..and my comments were meant to be global as today's issues will effect the entire world.
so much for tech stocks.............??
I think some real honest talk on how to prepare one's self for the 2nd great depression would be in order.
Fastback49 .. Looking around the world, I think more than "just one's self" ought to be in on the conversation, about what to do with the adjustment in these depressing financial times. The sad part about watching things unfold, is that It could have been prevented with bold measures from some statesman in Congress (fiscal policy) .. and some common sense in Europe instead of the picket fence attitude.
I don’t see a whole lot of upside in the tech sector for quite some time. I only see huge amounts of risk. Oh, well where fools rush in. Knock yourself out, but when labor shortages cap growth, skyrocketing labor costs sap earnings, bitter labor strife affects production schedules, and other mismanagement whip saws your tech portfolio in comming years don’t say I didn’t tell you so.
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