The year is 2021. The markets are booming, almost all major tech stocks are at record highs, and you’re finally ready to invest in some high-tech companies. But which ones? There are so many options out there that it can be hard to decide what company will turn out to be the best investment for your portfolio. The first step in picking a tech stock is to evaluate the company’s financial health. You need a company with a proven track record of success, and you want it to be profitable.
The next thing you should do is find out if there are any upcoming IPOs on the horizon for this company. If so, then now would not be the time to invest as they may not have had enough time to establish themselves yet. Finally, look into how much liquidity is available for your favorite stocks and what their share price will be in 2021.
Here are four points to keep in mind while picking tech stocks in 2021:
1. Traditional Techniques of Appraisal Should be Avoided
Standard investing needs you to assess the stocks you’re intrigued in using traditional valuation methods, including such earnings per share, profitability ratios, or asset pricing formulae – but this isn’t the case with technology stocks. Businesses in the sector are required to spend on research and development regularly. Video conferencing software Zoom, for example, came out on top in the epidemic economy.
Nevertheless, their quickly slowing sales growth caused a 15% drop in stock prices. They just revealed that they would purchase cloud-based customer support software startup Five9 for remaining ahead of the competition.
Investors in technology companies must realize that potential, not profitability, is what drives their decisions. That’s why the cost ratios of technology equities are frequently high.
Since investors expect significant future growth, corporate earnings appear modest compared to the costs of their shares. Regarding fast-growing firms without substantial profits, it’s best to focus on essential indicators as price-to-sales, which measures stock price to gross revenues or total sales growth.
2. Keep a careful eye on technological developments
It is essential to monitor the technological development in the industry and how it affects your business. If you see something new or improved, start thinking about how that could affect your company’s product line and what potential changes may be necessary to stay competitive. You don’t want to be left behind when your competitors start using this new technology.
This also includes keeping up with a new business strategy and management techniques. There’s a lot of information out there, so it will be important for you to carefully choose what articles and books you read and who your mentors are to stay on top of the latest trends.
3. Examine both large and small IT companies
If you want to invest in the technology sector and don’t know where to begin, then look at both large companies and small ones. Suppose your company is a huge conglomerate with many subsidiaries across various business sectors, such as IBM or Alphabet (Google). In that case, it can be helpful for these businesses to diversify their holdings so they aren’t too heavily reliant on one specific industry.
Smaller IT companies are good because usually if they’re making money now, the chances are that trend will continue into 2021 and beyond; however, this isn’t always true since any number of factors could affect them during those years, like market conditions and increased competition.
4. Don’t forget about emerging markets
Many of the most promising tech companies are based outside the U.S., but they’re nearly impossible to invest in with a mainstream mutual fund or ETF (exchange-traded fund). One solution is an actively managed global growth equity fund like T. Rowe Price International Stock Fund (TRPSX) that invests in both developed and emerging markets across all sectors, including technology.
The main drawback? It has an expense ratio of 0.94%, whereas index funds generally charge about 0.20%. That difference won’t make or break your portfolio, particularly if you hold for at least five years, which is how long it typically takes international stocks to outperform their home counterparts over time.
The Bottom Line
Some of the best opportunities to make money in tech stocks are when you least expect it. With the latest tech trends like voice search, AI assistants, and driverless cars coming into play, this is precisely what’s happening right now. By following some basic guidelines, you can get your feet wet without risking too much capital while still having fun and learning along the way.
If you need help stocking up on quality growth stock picks for 2021 or any other year, be sure to check out our complete list today.