5G investing can be very profitable if you know what strategies to use. Factor investing, for example, is a strategy used to evaluate stocks and bonds and select ones that are most likely to deliver high returns.
There are two main types of factors that are used in the evaluation: macroeconomics and style factors. Macroeconomics examine the outside factors that are likely to influence the performance of a stock or bond such as the economy, interest rates and inflation. Style factors consider the security itself and examine things such as a company’s credit, share liquidity, market capitalization and the volatility of the stock price.
In this article we look at using seven factor-based strategies for 5G investing that can be used to evaluate fifth-generation (5G) Internet stocks. We will then be able to determine if they will add growth to a portfolio.
- Economic Growth
- Interest Rate Movements
- Emerging Markets
- Financial Health
Factor-Based Strategies For 5G Investing: Economic Growth
Let’s start with macroeconomic factors. An important one to consider is economic growth in the country where you’re considering buying a bond or stock in a company.
Obviously, the global economy has been walloped by the Covid-19 pandemic. The International Monetary Fund’s (IMF) most recent “World Economic Outlook” forecasts that global growth for 2020 will come in at –4.4%. That’s an improvement over the IMF’s forecast in June of this year, when it predicted -4.9% growth. However, the international organization downgraded its outlook for 2021, saying it now sees a 5.2% increase in global output next year, down from 5.4% in its previous report. The Organization for Economic Cooperation and Development (OECD) has also downgraded its 2021 forecast.
Investors should consider current and future growth on a global scale, especially after Covid-19. But they should more importantly look at economic growth of the country where they want to buy a particular security. Leading 5G companies such as AT&T (NYSE:T), Cisco (NASDAQ:CSCO) and Nvidia (NASDAQ:NVDA) are based in the United States. And current forecasts call for annual growth of 4.9%, down from an estimate in June of 6.8% annual growth, according to the National Association for Business Economists.
The outlook for the U.S. economy is growing dimmer as hopes for a new round of government stimulus fade. However, investors should also consider how the U.S. economy was performing before the pandemic hit (strongly) and how it will recover once a vaccine against Covid-19 is widely available (also likely to be strong).
Interest Rate Movements
Another factor to consider are interest rates and whether they are likely to rise or fall over the coming year. In general, lower interest rates are a positive for businesses as they allow companies to borrow money at favorable terms and repay their debts at lower costs. In this regard, things look extremely favorable for 5G investing as central banks around the world, including in the U.S., have slashed their interest rates to historic lows and promised to keep them at current levels for an extended period of time.
Federal Reserve Board Chairman Jerome Powell said in September that he expects to keep U.S. interest rates near their current rate of near zero through 2023. This news is great for 5G stocks as the companies behind the faster Internet are having to borrow heavily to build the infrastructure needed to run 5G networks.
Verizon Communications (NYSE:VZ), for example, plans to increase its number of 5G cellular sites by 500% in 2020 and deploy its 5G network in 30 new cities by the end of the year. That’s a major investment on the part of Verizon and it doesn’t come cheap. Making such big investments in a low interest rate environment is positive for 5G investing.
The last macroeconomic factor we’ll look at is what’s known as “emerging markets.” This factor considers things such as political and sovereign risks in countries where an investor is considering placing their money. This is important when you consider that a number of leading publicly-traded 5G companies such as Alibaba (NYSE:BABA) are based in China.
Not only is China’s political and business environment more risky than many other parts of the world, but the Chinese and U.S. governments are openly fighting over a number of business issues — from trade to which Chinese companies should be allowed to operate within America.
A number of other leading telecommunications companies that are leading 5G network builds around the world, Ericsson (NASDAQ:ERIC), are based in Europe. European nations tend to have more stable political environments and are less risky than many emerging market countries.
Taking into account geopolitics is important when evaluating the long-term growth prospects of an investment, especially in an emerging sector such as 5G. As a general rule, investors should look for stocks of companies that are operating in stable countries with sound governments and equally sound government finances.
Turning to style factors now, we can look at the value of a 5G stock and whether it is trading at a discount relative to its underlying fundamentals. Evaluating stocks based on their value is not new. It is a concept known as “value investing” and has been popularized by famous value investors such as Warren Buffett.
The idea is to look for stocks that offer good value for the money. In a nut shell, stocks that are currently trading below where they should be and are likely to appreciate in value over the medium- to long-term. Value investing involves both patience and a long-term time horizon. Buying a stock based on value is not for investors who are looking to quickly flip shares once the price moves upwards a little.
In the realm of 5G stocks, look for companies whose share price may have been beaten down in recent months or years but could rebound as 5G networks come online. A company such as Sierra Wireless (NASDAQ:SWIR) has seen its stock price bounce around this year and is below is 52-week high at just $11.44 a share. But the company, which sells wireless communications equipment, could benefit from the build out of 5G infrastructure around the world.
Also look for stocks of companies that are not directly involved in 5G networks but could benefit from the shift to faster Internet speeds. Companies such as Intel (NASDAQ:INTC), which recently released several 5G networking components and is part of a next-generation wireless equipment market that is forecast to be worth $25 billion.
Momentum refers to stocks that are experiencing upward price trends. Share prices that have risen and may continue to rise going forward. Momentum tends to indicate the underlying strength of a stock. Sometimes individual stocks can experience momentum and sometimes an entire sector of stocks can rise together at the same time.
Identifying momentum is often easier to do than determining if a stock is undervalued at its current price per share. However, momentum can be a double-edged sword. On one hand, investors want to buy a stock on the upswing. But on the other, they don’t want to chase a stock that has run up in value only to see the share price plateau or, worse, fall.
When evaluating momentum, be sure to look at how far the stock price has moved over certain periods such as the last month and year-to-date. Also look at the stock’s historical, long-term momentum. With 5G-related stocks, it might pay to consider certain sectors that have been experiencing momentum.
Semiconductor stocks of companies such a Nvidia, Advanced Micro Devices (NASDAQ:AMD) and Marvell Technology (NASDAQ:MRVL) are all involved in making chips to help devices connect to and operate on 5G networks. All three have seen sharply higher share prices this year. Similarly, telecommunications companies that are building the cell towers needed to run 5G Internet could also move in tandem.
Financial health refers to the fundamentals of a company. It takes into account things such as revenue, profits, earnings-per-share and debt levels. Investors get a snap shot of the financial health of publicly traded companies every three months when they report their quarterly earnings. Investors who have a position in a stock or who are considering taking a position should pay close attention to quarterly results to ensure that a company remains financially fit.
Changes in financial health can negatively impact stock prices. When revenues drop or debt loads climb, it can lead to falling share prices. On the flip side, many stocks pop immediately after they deliver better-than-expected quarterly results or if their financial health dramatically improves.
With 5G stocks, look to invest in best of breed companies. That is, companies that are the healthiest when it comes to their finances. One of the reasons why NVDA stock has risen 131% year-to-date is not just because of the company’s involvement in 5G or its growth alongside the broader semiconductor stocks, but because Nvidia has consistently delivered solid quarterly results and its financial health remains robust.
The same could be said for other 5G stocks that have climbed higher in 2020, such as Cisco. Ensuring that any company is financially strong and healthy is important before buying shares of a stock.
When it comes to investing, volatility is bad. A solid factor-based strategy is to seek out stable, lower-risk stocks. Investors should value stability over price volatility.
A stock with a price that has extreme fluctuations and is constantly hitting new highs and lows is considered highly volatile. A stock that maintains a relatively stable price or has steady upward momentum has low volatility.
Volatile stocks are much riskier to invest in. While some investors might like volatility because they feel the chance for success is higher, it’s important to remember that the likelihood of failure is equally high.
With 5G companies, look for stable stocks that do not have volatile share prices. This tends to mean stocks of companies that have been around for a while, are established and have good financial health. Stocks of newer and smaller 5G companies tend to be more volatile and risky to put money into.
Companies such as AT&T and Intel that have been around for a long time have established track records and stable stock prices. While T and INTC might not grow as quickly as some investors like, the share price is also unlikely to drop suddenly and without warning. There’s something to be said for stability when it comes to investments.
On the date of publication, Joel Baglole held shares of NVDA and BABA.