People can become infatuated with potential, and that’s particularly true when it comes to investing in tech stocks. But Validea CEO John Reese says that investors shouldn’t get too smitten with tech plays that are more hype than substance.
“When it comes to investing, I’ll take ‘proven’ over ‘potential,'” Reese writes for Canada’s Globe and Mail. “And while the tech sector talk often focuses on potential, it holds plenty of proven plays, too. IBM, Microsoft, Apple and others have gone from being fast-growing small companies to big, steady stalwarts. It’s an inevitable transition. You can’t grow earnings at 50 per cent a year forever; companies can only get so large. In addition, spotting the next Apple, which has increased in value by more than 29,000 per cent since its 1980 IPO, is equivalent to finding a needle in 10 hay stacks. Ask around – do you know anyone who invested in Apple in the early days and stuck with the company?”
Reese talks about the challenges that confront investors who invest in new, high-flying tech plays — such as valuations. “Yes, some of these companies may be growing at 30 per cent to 40 per cent – or even more – but when they trade at astronomical price-earnings or price-to-sales ratios, any disappointment or even hiccup in growth is likely to put the stocks out in the woodshed with investors,” he says. “Disciplined fundamental investors understand that companies with valuations two, three or even four times that of the market are mostly unsustainable over long periods of time.”
“Such comments on some of the hot tech firms of the day might sound subdued coming from an MIT grad and technology entrepreneur turned money manager,” Reese says, “but I put the facts and my experience ahead of my emotions and biases when it comes to investing my firm’s capital and the funds I run. You should do the same.” He offers a number of “old tech” picks that his “Guru Strategy” computer models are high on right now. Among them: Apple, Qualcomm and IBM.