With the Nasdaq Composite once again making new highs, there’s plenty of talk of a tech bubble — but also plenty of reasons to believe the tide could keep rising.
When it comes to picking the right stocks to ride the momentum, though, things can get a bit tricky. While the sector doesn’t look particularly frothy, there’s still concern about hopping on board at too high of a price (or right before that price reverses).
With that in mind, one way to play the tech sector a bit more safely — at least in theory — is to search for long-term trends. While there are always new, shiny technologies coming out of Silicon Valley, taking a step back and identifying mega-trends can help investors better pick the companies least likely to come crashing back down to earth in coming months or years.
Let’s take a look at three such mega-trends, and what stocks investors could consider if they decide to bet on them.
3 Tech Stocks Powered by Mega-Trends: AeroVironment (AVAV)
Drones, which once seemed like either a faraway sci-fi dream or simply playthings for hobbyists, are (ahem) ascending rapidly with regards to applications and acceptance. In fact, the first FAA-approved drone delivery took place just this past Friday via Australian startup Flirtey. And that’s just one proof point for the mega-trend; Fortune’s Clay Dillow recently pointed out that “companies that broker drone services could soon be the biggest players in the U.S. commercial drone economy.”
An Australian startup isn’t accessible for most investors, though, while a lot of drone-related companies are hardly pure plays. Amazon (AMZN), which has been battling the FAA on drone delivery of late, is the first that comes to mind, but there are so many question marks and so many other revenue streams. GoPro (GPRO) is another example, but it’s a natural fit for the aforementioned hobbyist market as opposed to the commercial one.
If you’re hunting for a drone pure play, AeroVironment (AVAV) seems to be the best option out there, although the stock’s been sinking of late. The drone-maker works with government agencies, businesses and consumers, including supplying organizations within the Defense Department and is likely to ride the drone mega-trend higher if this truly is just the beginning.
3 Tech Stocks Powered by Mega-Trends: ARM Holdings (ARMH)
Mega-Trend: Internet of Things
YTD Performance: 3%
One mega-trend that investors have heard a good deal about in recent years is the Internet of Things, which is basically just a fancy phrase for the fact that more and more devices are being connected to the Internet via new technology (like sensors). Perhaps the most cited statistic comes from the IDC and predicts that the IoT market will reach $1.7 trillion by the year 2020.
Tech giant Cisco (CSCO) and its (soon-to-be-former) John Chamber have been working hard to brand themselves as the core Internet of things play, constantly tossing out statistics and infographics explaining the trend and actually buying an IoT play during its recent shopping spree. But as is the case with Amazon and drones, Cisco is arguably too big and diversified to be anywhere near the best way to play the trend.
Instead, there are plenty of companies helping connect various devices to the Internet via chips, sensors and so on. ARM Holdings (ARMH), for example, licenses the processor architecture that powers a large percentage the world’s smartphones — the most obvious and popular of all devices making up IoT networks — and is rapidly expanding to other items like appliances, as Fortune noted when nodding to the trend late last year.
The stock is up a solid 200% over the last five years, although it’s moved mostly sideways so far this year.
3 Tech Stocks Powered by Mega-Trends: FireEye (FEYE)
YTD Performance: 47.2%
Everywhere you look there’s proof — scary proof — of just how much everyone from individuals to government agencies need better cybersecurity measures. Fingerprint records, which of course can’t be destroyed or reissued were stole during the recent Office of Personnel Management hack, while UCLA Health Systems was just breached as well.
No wonder investors pumped $1.2 billion into cybersecurity startups in the first half of 2015, or that investors bid the PureFunds ISE Cyber Security ETF (HACK) up almost 20% since the year started. One of the biggest names in cybersecurity makes up just under 4% of that fund, though … but has risen nearly 50% so far this year alone.
That company is FireEye (FEYE), which makes software to detect, prevent and resolve cyberattacks. As an analyst recently told The Street’s Rex Crum, the company has become the “Navy SEALs of cybersecurity.” One thing to note, though: FireEye, like many up-and-coming tech stocks, is not yet profitable. But if the mega-trend indeed pans out, the potential could indeed translate to profits to more stock gains.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.