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February 01, 2012 at 07:00 PM
To speak about innovation in technology would be almost redundant. After all, there can be no innovation without technology, nor technology without innovation.
Yet innovation, no matter how exciting it may be, is a scary concept, particularly in scary times.
“Convincing people of what’s beyond the unknown is tough,” says Kevin Landis, president and chairman at Firsthand Funds. “Technology has historically offered the best prospects for growth because it’s all about opening up new markets, but when you do that, you also add a lot of unknowns. To an investor trying to make it through tough times, unknowns mean blind risk, and people tend to shrink away from that in times like these.”
Nevertheless, technology also has a certain “undeniability” to it, says Landis. “You may have looked into the first iPhone and thought Apple was nuts to get into it, but then you’ve seen how successful it is, and you can see that the trend is very real.”
Landis firmly believes that this is the case for technology as a whole. As much as the sector has been affected by the general market downturn, the future potential that the vast world of technology offers is great, he says, but investors are wary about getting involved.
The technology sector—which is so large and diverse that it spans the gamut from classic IT to sectors like semiconductors and alternative energy—is also far more robust than it was in the run-up to the 2001 meltdown. Tech experts are convinced, though, that the complete destruction experienced then cannot happen again for a variety of reasons, not least the fact that technology companies the world over have strong balance sheets and solid cash reserves.
The tech landscape is also very different today than it was before the 2001 blow-up.
“In 2000, you had so many fantastic offerings and so many different companies with great ideas that wanted to take advantage of what the Internet had to offer,” says Phil Tasho, (left), CEO and CIO of TAMRO Capital Partners, “but the infrastructure just wasn’t robust enough for them to be able to do so. There was really no ability to go forward, even though investors believed that growth would be exponential. Now, there is tremendous connectivity in the marketplace, and that will allow for so many companies to go forward.”
Prior to 2001, technology was a space where valuations were based on expected future earnings, but no one really knew when or how those earnings were going to materialize, says Ryan Issakainen, senior vice president and ETF strategist at First Trust Advisors.
“Fast forward a decade and the cash flow and earnings are there to substantiate what was just hope for many technology companies just a few years ago,” he says. “There is a lot of forward-looking innovation to come. Globalization and the expansion of technology into markets where it hasn’t been utilized before will help to support growth going forward.”
Tech experts say that those dynamics will also help trump the overall macro risk both in the United States and overseas. They’re expecting technology to be the biggest investment trend over the next decade. Here are some of the key drivers for the sector they believe investors need to stay abreast of.
Concepts and Solutions in Niche Markets
One of the greatest drivers for the technology sector is the need for holistic solutions that will enable companies to be more efficient in their businesses.
In an environment where credit continues to be tight, CFOs need to keep strict tabs on their companies to make sure that they’re as lean and mean as possible, says Greg Estes, lead portfolio manager of the Intrepid All Cap Fund (ICMCX). Smaller players that can provide specialized services are the ones that will have a comparative advantage, he says, and will make for some of the best investment opportunities going forward.
Estes, (left), gives the example of CoreLogic, a spin-off from First American Corp. and a provider of a proprietary database that allows financial institutions to make queries on the creditworthiness of individuals to whom they’re looking to extend credit. The more specific or detailed the query, the higher the margin that CoreLogic earns, Estes says, which means that “this company is a market leader in what it does and so it is not subject to cyclicality and maintains high growth,” he says.
TAMRO Capital’s Tasho likes companies like AthenaHealth, an electronic medical recordkeeping and billing company and a niche player in a sector where automation is becoming more and more the norm, and where technology has tons of potential.
“The movement of electronic recordkeeping [...] is a growing trend in health care, and AthenaHealth has carved a niche for itself doing this for very small physician practices,” he says. “The company has been doing this for 10 years, but they have only a 10% market share, so this is a killer category to invest in.”
Tasho believes in looking for innovators, companies that are making their mark and have a competitive advantage over time based on the particular solution they offer clients.
“Companies need to keep moving forward with technology so we’re looking for names that can provide unique services that resonate with the marketplace, and are not affected by the downturn,” he says.
The Cloud
Shared resources, shared information, shared services—putting everything out there, basically. That’s a scary thought, says Issakainen, but it’s inevitable, because cloud computing is going to be the biggest tech driver for the future.
“If you look at Asia over the past decade, it’s been about cheap labor and capital inputs for growth,” Oh, (left), says, “but there’s been a huge wage inflation in Asia and many companies are shifting to technology in order to increase productivity growth without hiring more people. The rationale [for the fund] was and still is today that the tech sector will play a greater role in contributing toward general economic growth.”