Earnings season has shown us that it’s a good time for tech stocks.
Apple Inc. (NASDAQ:AAPL) stock has reached record highs in 2015 and has become the first U.S. corporation to reach a market capitalization of more than $700 billion. But it’s not just Apple driving the sector.
The Nasdaq Composite has surpassed 5,000 for the first time since dot-companies ruled the market back in 2000. The S&P 500 has topped 2,100 for the first time ever.
So now might feel like the right time to worry about whether you missed the rally in tech stocks … but it’s not. There’s still more ladder to climb.
Why the Rally in Tech Stocks Can Continue
With large-cap tech stocks driving the major indices to all-time highs, there’s a general belief that U.S. equities as a whole — and tech companies specifically — are at least fully valued.
But the analysts disagree.
BlackRock managing directors Russ Koesterich and Heidi Richardson shared in a research note “This is a story of relativity. While the U.S. market is fully valued, large-cap tech stocks appear reasonable by comparison,” noting that the tech sector has a price-to-earnings ratio of 13 compared to the S&P’s 17. “These cash-rich, mature IT companies, ranging from the network software engineers such as Cisco, to the comparatively youthful Facebook social network, are well-placed to benefit from secular demand trends.”
That statement hits on a few of the reasons why you can have faith that large-cap tech stocks can keep growing from here, but let’s take a quick look at the three most important factors:
- Changing demographics over the next 10 years: Call it the rise of the millennials. It’s the first generation to predominately grow up in an Internet-dominated world, and they bask in and devour technological advances. Millennials are expected to make up around 25% of the U.S. population by 2025.
- Cash has created stability and opportunity: Large-cap tech stocks have become cash cows. These are not the fly-by-night companies of the dot-com era. From a CNN Money report: “Companies in the Nasdaq 100 had an average of about $50 billion in cash in 1999; now those companies have $206 billion in cash, says Rayner Turley, a tech analyst at Nasdaq Advisory Services.” That’s a game-changer as now these companies can weather storms and still invest in R&D. The heavy cash position also can serve as protection against rising interest rates, as it could become more expensive to both pay back existing debt and take on new liabilities otherwise.
- Consumer demand: It’s hard to ignore things like the fact that Apple sold 74.5 million iPhones in its fourth quarter, or its $18 billion in revenues. As long as demand remains strong for technology, gadget-makers and component manufacturers alike will come along for the ride.
Play Tech Stocks With XLK
The Technology SPDR (ETF) (NYSEARCA:XLK), at $13.3 billion in assets, is the largest, most popular exchange-traded fund that deals with tech stocks. Overall, XLK holds more than 70 stocks such as Microsoft Corporation (NASDAQ:AAPL) and Verizon Communications Inc. (NYSE:VZ), though Apple enjoys the largest weighting, representing nearly 18% of the entire fund’s assets.
So while this is very much a broad tech play, it’s also something of a bet on Apple itself — and for now, that’s more help than hindrance. Apple has several drivers, including its new Apple Watch — Analyst notes from JPMorgan and Morgan Stanley believe that AAPL could sell anywhere from 26 million to 30 million watches this year — and the recently unleashed Apple Pay.
Meanwhile, XLK costs just 0.15%, or $15 annually for every $10,000 invested, in expenses.
As AAPL and the sector are positioned for stability and future growth, XLK will go along for the ride.
As of this writing, Jason Jenkins did not hold a position in any of the aforementioned securities.
