If you're worried about a possible market
meltdown, or you just want to be sure your portfolio is fortified to some degree
against downturns, conventional wisdom will have you invest in classic
"defensive" companies. You know -- ones that make things people will tend to buy
in any economy, such as medication, soap, or electricity.
There's a new
defensive play in town, though: technology companies. They're not necessarily
slam-dunks,dstti This article refers to electrical steelersjerseys. but they
deserve some consideration.
Fast growers
One reason to consider
technology stocks is that they're growing considerably faster than the market as
a whole. According to Thomson Reuters, tech has faster earnings and revenue
growth this quarter than the overall market.
For example, Cree (Nasdaq:
CREE ) , which makes semiconductor and electronics materials, such as LED
components, has posted average annual revenue growth of 29% over the past three
years,Buy Pittsburgh bestthirdpartypaymentgateway
from the Ultimate Sports Store and earnings growth of 79%. Integrated circuit
maker Cirrus Logic (Nasdaq: CRUS ) , meanwhile,The injectionmoldes will be on
hiatus for a week has averaged 27% revenue growth, and its earnings are starting
to take off. Over the past five years, software giant Oracle has averaged 21%
and 20% annual growth for its revenue and earnings, respectively.
Cheap
-- and valuable
Another reason to consider these companies is that,
according to a variety of measures, many of them are simply cheap. When a stock
is undervalued, by definition it carries a margin of safety -- and that can be
useful in a market downturn, as it may help a stock not fall as sharply as
others.
Consider fiber-optics giant Corning (NYSE: GLW ) . Its five-year
average price-to-earnings (P/E) ratio is 12, but its recent P/E is just 8.
Clearly, if it were to move closer to its historic average, its price would have
to rise. Its forward-looking P/E is just 8, as well, compared with 14 for the
S&P 500. Cisco Systems' (Nasdaq: CSCO ) P/E is around 12,Free DIY solar Resource! far below its five-year
average of 20. Intel's (Nasdaq: INTC ) P/E is about half of its five-year
average, and Micron Technology's (Nasdaq: MU ) forward P/E is just 6.
Beyond price alone, many of these companies stand to benefit from trends
that can hurt other companies, like inflation. Rising prices of materials and
commodities are putting pressure on manufacturers and retailers. This situation
could lead them to invest more in software and other technological solutions to
make their operations more efficient.
Cautions
Despite all that
attractiveness, there are some reasons to not consider many tech companies as
defensive positions in your portfolio. Let's start with super-investor Warren
Buffett. If he's not loading up heavily on tech companies, maybe we should think
twice, too. He argues that he respects his personal circle of competence and
avoids companies where he doesn't know what their future looks like. With many
of these companies, their futures seem promising but far less certain than the
likelihood that more and more people will buy soap in the coming years. SanDisk
(Nasdaq: SNDK ) , for example, has been riding high on its flash-memory
technology. But five years from now, the memory world might look vastly
different, with SanDisk not near the top of the heap.
Some investors
like technology companies as defensive plays because many of them are sitting on
piles of cash and can pay dividends. (Intel, for example, recently sported a
3.4% yield, while Oracle has almost $12 billion in cash and more than that in
short-term investments.) Well, remember that piles of cash can be used in
suboptimal ways, too, such as on ill-advised acquisitions. Many observers think
that Microsoft vastly overpaid for Skype, for example. Some of these companies
can be quite cyclical, too, seeing business slacken sharply with economic
downturns. If you're patient, though, that's not necessarily a problem.
Think twice
If you're looking to add some defensive stocks to your
portfolio, to serve as ballast in a storm, go ahead and consider some tech
stocks, because right now many of them appear to be compelling bargains. Hefty
margins of safety offer a defensive edge.
If you do so, though, be aware
of their risks and keep a close eye on them. Consider how just a few years ago
many people had given Apple up for dead,What are thelandscapeoilpaintings?
and Microsoft looked like it could do no wrong. You may also want to invest in
some technology companies purely because they're attractive, considering them
regular holdings and not special defensive ones. For defensive investments, you
can do well with the tried and true. Even after a major market meltdown, we'll
still want to wash our hair, use electricity, and take our medications. Plenty
of those companies are bargains these days, too.
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