Cash Is King In This Sector Right Now…
The Smart Profits Report #537
Wednesday, July 9, 2008
by Paul Moore, Technology Specialist, Smart Profits Report
Editor’s Note: After a brutal first half of 2008 that sucked the wind out of many investors’ sails (not to mention money from their portfolios), it wouldn’t be surprising to see many hunker down and view the rest of the year as an exercise in damage limitation.
However, while the future may look bleak, that certainly doesn’t mean there aren’t any opportunities to profit. In today’s column, I’d like to introduce you to the newest addition to the Smart Profits Report team – technology expert, Paul Moore. Paul began his career at Morgan Stanley, helping to cover Enterprise Software and now boasts 13 years of experience analyzing technology companies as an analyst with several hedge funds and two bulge bracket investment banks.
In Paul’s debut column below, he explains why cash really is king for tech sector companies, shows you why these companies can stand strong, even when others are falling, and notes which tech area usually recovers from the bear market first. Enjoy. ~Martin Denholm, Managing Editor, Smart Profits Report Beat The Bear By Looking At This Tried-And-Tested Indicator Forget Hurricane Bertha… there’s a hurricane whipping through Wall Street at the moment – one that stubbornly fails to break up and give investors much relief. With stocks sinking across the board, it’s no surprise that many investors are wondering whether it’s possible to make money in this market. And if so, how? Let me first urge you not to despair. Even in a bear market, smart investors can find support and profits. The thing is, though, many simply don’t know where to look, or are too fearful. In my years of investing experience, working for firms like Morgan Stanley, I’ve found that there’s one path that usually leads investors in the right direction towards the bear-beating ideas. Follow the money. Let me show you what I mean… Got Cash? Three Ways That Cash-Rich Companies Can Fight Back In A Down Market When you’ve got a market hurricane wreaking havoc with investors’ portfolios, cash is the air in the life raft that keeps stock prices afloat. As a technology sector specialist, I can tell you that this is a particularly good sector to focus on when you’re looking for profitable ideas in a volatile market. This is simply because the group contains companies that offer better than average free cash-flow growth. And in a bear market, cash truly is king. Even if the market is flagging, a company that boasts a strong cash position has a number of options available that can support its share price. This includes: - Tactical acquisitions that sustain earnings growth. A good example here is Oracle (Nasdaq: ORCL).
- Share buyback plans that squeeze out short-selling interest – like we’ve seen with eBay (Nasdaq: EBAY).
- Cash distributions, as in the case of Microsoft (Nasdaq: MSFT).
The common denominator that these three companies share is that they all provide infrastructure that supports their customers’ businesses. And in a bearish environment, this is crucial, as it gives them the option to raise prices in order to offset the impact from tougher selling conditions where fewer units are sold. This kind of flexibility is evident in the performance of the Powershares QQQ (Nasdaq: QQQQ) – the ETF that tracks the Nasdaq 100 index. It’s outperformed the S&P 500 by 26% so far in 2008. That brings me to my goal – one that I hope to translate into profits for you… Even In A U.S. Slowdown, These Giants Walk Tall Simply put, I aim to find technology-focused investments that can outperform throughout any stock market conditions or economic environment – whether up, down, or sideways. Why technology, in particular? The sector is a good place to focus because the companies within it derive their revenue from many different types of customers – from narrow corporate sectors like telecom or financials… from general enterprise… and from regular consumers. And don’t forget, this includes specific countries or regions. For example, Oracle and Microsoft rely on enterprise license agreements that tap into all customers around the globe, so a slowdown in U.S. corporate spending has little effect. Based on information provided in Oracle and Microsoft’s filings, we estimate that US corporate customers account for roughly 40% of their revenue for each of them. So that means a 10% reduction in spending only impacts results by 4% – an amount that can be handily managed through cost-cutting. The Best Way To Beat The Tech Herd And Volatility
The tech sector is often considered to be one where the companies move together – a herd-like mentality. However, this is a misunderstanding that savvy investors can profit from by focusing on companies that have exposure to end markets that remain healthy, despite market downturns, or have a diverse client base. Each of the companies mentioned above sells into multiple areas and has exposure to multiple geographies. So how do you combat the increased volatility that comes from a down market? The primary focus is to not lose ground and right now, the most stable companies offer infrastructure-based products. These kind of companies are usually the first to recover from a downturn because the element of safety they have allows professional investors to park large amounts of capital without a great amount of risk. And as the market stabilizes, you can shift the focus towards higher beta ideas, such as the solar, energy storage and Internet sectors. I look forward to sharing much more with you in future columns and in the Xcelerated Profits Report newsletter soon, too. Paul Moore
Today’s Smart Profits Notes India draws new strength from weakness: While many in America long for the infamous “strong dollar policy” to become reality, a robust currency doesn’t necessarily translate to economic health. Just ask India’s IT sector. Suffering from a surging Indian Rupee against the US dollar, tech firms and other exporters have felt the pain from seeing their goods become more expensive for foreigners to buy. But a lobbying effort from this powerful group to India’s central bank and finance minister had the desired effect – and the rupee has now drifted back to a more favorable level. With the currency pressure on India’s IT sector having now eased, the sector’s exports are looking healthier, too. Exports in April soared by 31.5% over April 2007 and the total growth for April and May jumped by 21% (to $28.1 billion) over April-May, 2007.
Xcelerated Profits Report Investment Director Karim Rahemtulla alerted investors to the strong profit opportunity in the Indian tech sector at the start of 2008. The company he recommended is one of the biggest players in the sector and subscribers who took his advice are already enjoying a handsome gain. Not only that, Karim went further than regular investors by employing a his covered call strategy that lowered the original cost, lowered risk, and still provides very healthy upside potential. This is just one example of how the team’s experience and expertise allows you to handle the serious stock market challenges today. Karim and his fellow pro traders will guide you through the minefield, step by step, showing you how to stay protected and profit. Secure an entire year’s worth of stock and options picks, using the same strategies that Wall Street’s pros use every day to accelerate their wealth. And unlike the stock market, it’s risk-free, so you have nothing to lose. Check it out here.
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