With another tax year about to end, many investors may be taking one final review of their portfolio to decide what remaining stocks should stay and what stocks get the punt.
While throwing in the towel on technology stocks may eliminate the same pain next year, exposure to technology investments can create significant wealth in a growth-oriented portfolio. Given the year many investors have had, now – more than ever – is the time to work on your New Year’s Resolutions for technology investing.
Investors shouldn’t punish themselves. This has been an extremely volatile year. A look back at the intra-day volatility on the NASDAQ shows that investors haven’t been exposed to this steep a swing since 1985, the first time the figures were captured. For the Dow Jones Industrial Average, we have to go back to 1933.
So what can investors learn from this? I believe the behaviour of technology stocks demonstrates the extreme fear and greed factor that can overcome the capital markets. Emotions were even further pushed because the public bought these stocks heavily on margin borrowing in a year wheninvestors saw a lot of technology trends quickly come and go.
While the change of trends will not go away, we expect the timelines to be a little longer. In today’s highly-competitive business environment, technology is causing an upheaval in the value chain of many industries. The technology forces, primarily driven by the Internet, are rapidly blurring the differences among competing products and services. Market share erosion and pricing pressure is to be expected.
But the technology is also providing the best vehicle for adding value, reducing costs and leveraging a company’s competitive differentiation.
So what should investors do next? Nobody knows which company will become the next technology leader, but investors should understand there are a number of consistent characteristics in quality technology organizations that attract investors.
The obvious starting point is a burning market demand that is currently not being met and can be satisfied by new companies or better operators. This demand provides the opportunity for revenue growth and high profit margins.
This appetite is being identified in a timely fashion by key players — management that has been there before and knows how to invent or better execute a business model to capitalize on the industry trend. They have a clear strategy that can be easily articulated.
As you analyze the company further, you find that management has surrounded their team with quality people to get their job done.
Finally, the company is well capitalized to finance the business plan. They value their cash and are managing their working capital to get through early- stage growth. This is particularly a challenge today, given the current lack of appetite for share offerings in small companies.
As we review the universe of small-cap stocks in Western Canada, we attempt to find hidden opportunities with the same underlying fundamentals. These organizations have a vision to succeed and they are growing their top-line revenue at tremendous rates. It is only a matter of time for the rest of the market to catch on.
For investors who are committed to sticking with technology investing, we definitely recommend staying with quality names that demonstrate all the right characteristics.
When it comes to identifying suitable small cap investment candidates, I believe investors need to focus on the key players — management and the quality people they hire to drive their business plan. Being a leader in one of these technology companies is challenging — attracting and retaining a talented workforce while operating on compressed timelines, limited capital resources and a rapidly changing technology environment.
In ‘old economy’ businesses, a company’s assets are measured in terms of hard tangible assets — the items you can touch and feel and see in operation.
For technology companies, the most valuable assets go home every night. Leveraging and continually creating new ideas from the knowledge of the new economy worker relies on a work environment that promotes sharing and learning. Building a technology company takes more than just putting people in front of a computer.
While this may seem self-evident, you may be surprised that many technology companies do not develop environments that foster innovation. As a result, most of these companies cannot turn on a dime and make changes should they lose any competitive advantage in the market as trends change.
What does an organization that exhibits strong, sustainable growth to get through the trends look like?
The companies that continually stand out are those that can reinvent themselves.
Communication, trust, risk-taking skills, shared vision, self-knowledge and a “big picture” view are common themes in these companies. The teams in these companies are constantly learning from one another and are always looking for new opportunities. Constant improvements in efficiency and differentiation are the norm.
As you reach out to invest in technology, remove the emotions and do your homework. And remember, knowing the story means knowing the leaders of the company and understanding the cultures they have created.
(Brian Pow is a technology analyst and director of research with Acumen Capital Finance Partners Ltd. Topics discussed in this column are the view of the writer and do not necessarily reflect those of the company.)
