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Will Technology Stocks Lead The Market Once Again? + Vic Wisemann’s Thoughts on: AAPL, GIS, AMAT, CACI, ADI, HPQ

Vic Wisemann
InvestorsObserver
Featured Contributor

Tech stocks are probably the hardest sector for investors to make money. There are significant obstacles that come with investing in tech, such as the hype surrounding the sector and individual stocks, large price-to-earnings multiples and lots of volatility.

Furthermore, one of the biggest aspects of most tech stocks is the lack of dividend payouts and the tech stocks that do have dividends are typically very low yields. The lack of dividend is typically justified by calling these stocks ‘growth’ stocks; however, this poses a serious challenge for investors. With no dividend payments, it would appear the only way to make money by investing in tech is buying a stock and selling it for a higher price. This might sound obvious, but this is the most important thing you can take from this article.

Buying a stock and selling it for a gain is much harder than most think, especially your average at-home investor. Assuming you are not a day trader, generally speaking, you will have to buy a tech stock in a bear market and sell it in a bull market in order to make money on the position.

Tech stocks typically get a great deal of attention and hype, especially during bull markets. Since average investors must do their own research using the Internet or television, there is much more press and coverage over certain tech stocks than other less glamorous companies -- think Apple (AAPL) vs. General Mills (GIS). Because of the hype around an upwardly-charging tech stock, many will buy into tech during a bull market; usually, this will happen after the large move upward.

Read on  to see what strategy you can use to put tech profits in your portfolio today.

Why do people not buy tech during bear markets? Well, for one, tech stocks get punished during bear markets. Since tech stocks typically have higher multiples, these stocks will always get pummeled during a bear market. Most average investors struggle pulling the trigger on a position that is down 50%, 60% or more.

To sum up, most people buy tech stocks during bull markets, not bear markets; which, in many cases, will end up losing money.

But we are not in a bull market and many tech stocks are trading well below their highs. Buying and waiting for the stock to move enough to make your targeted profit, however, can eat up your buying power and give you very little in return until it comes time to sell.

Most investors struggle selling a position in any case. Emotions, mainly greed, get in the way of making an objective sell. If you’re down, you want to get back to even, and then sell. If you’re up, you want the ride to go just a little higher, then you will cash out.

With tech, it’s even harder. If you’re lucky and you buy during a bull market, yet the bull continues so you have some paper gains, you end up thinking that this investing game is so easy. You get overconfident and you don’t take your profits. Other times, the volatility is so huge that you end up quickly selling for a loss instead of ignoring the day-to-day fluctuations.

This is where options come into play in a big way. Since you can achieve a very nice return with strict loss controls, you can play the more volatile stocks with much less worry. In fact, more volatility (to a point) allows for higher potential returns.

Earnings season is moving along, but there are still some nice technology stocks with announcements coming up. Earnings add some extra volatility to the mix and we see this in higher option prices, which is good if you are a seller.

Applied Materials, Inc (AMAT) is scheduled to report results for the third quarter of fiscal 2009 on Tuesday, August 11, 2009. In the second quarter, the company reported earnings per share of $-0.12, lower than the analysts’ consensus estimate of $ -0.101. Analysts’ estimate for the third quarter ranges from a low of $-0.13 to a high of $0.04, with a consensus of $-0.084.

CACI International Inc. (CACI) is scheduled to report results for the fourth quarter of fiscal 2009 on Wednesday, August 12, 2009. In the third quarter, the company reported earnings per share of $0.77, higher than the analysts’ consensus estimate of $ 0.76. Analysts’ estimate for the fourth quarter ranges from a low of $0.86 to a high of $0.98, with a consensus of $0.93.

Analog Devices Inc. (ADI) is scheduled to report results for the third quarter of fiscal 2009 on Tuesday, August 18, 2009. In the second quarter, the company reported earnings per share of $0.09, higher than the analysts’ consensus estimate of $ 0.21. Analysts’ estimate for the third quarter ranges from a low of $0.19 to a high of $0.24, with a consensus of $0.20.

Hewlett-Packard Company (HPQ) is scheduled to report results for the third quarter of fiscal 2009 on Tuesday, August 18, 2009. In the second quarter, the company reported earnings per share of $0.86, in-line with the analysts’ consensus estimate of $ 0.86. Analysts’ estimate for the third quarter ranges from a low of $0.82 to a high of $0.91, with a consensus of $0.89.

With the added volatility of earnings added in and a bullish bias to the market, a Bull Put Spread seems to be a nice trade for this market. For HPQ you may want to consider the September 38/35 Bull Put spread for a 35 cent credit. That's a 13.2% return and the stock has to fall 10.2% to cause a problem.

As the market emerges from the bear market, which was driven by a commodities and housing bubble, expect market leadership to rotate. Technology stocks could be poised to once again lead the way.

If you have had any additional thoughts, ideas or earnings reports to watch, please e-mail me at vwisemann@InvestorsObserver.com.