When evaluating tech stocks, look for companies that have low earnings variability.
These businesses are more likely to offer predictable cash flows and growth, says Mark Lin, vice president and portfolio manager at CIBC Asset Management. He manages the Renaissance Global Science and Technology Fund.
“Any investment we hold in our portfolio should be able to exhibit the ability to grow its cash earnings year after year,” he adds. As such, he looks for companies that are market leaders, and for those that offer products and services that won’t undergo drastic changes each year.
In fact, Lin notes it can be risky to choose growing companies that may face big competition in coming years, as well as businesses in the early start-up phase.
“High earnings variability, even when there’s strong growth, isn’t something we like to consider for our portfolio,” he says. “We can’t really evaluate what kind of risks we [could be] involved in when we look at start-ups [and] it’s just very hard to evaluate future growth prospects.”
He says his goal is to always “look at the [potential] growth of companies and try not to pay too high of a valuation for [stocks].” And, he suggests, “investors should look for companies that can generate real cash.”
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Also, people interested in the tech space have to be prepared for volatility, says Lin. For example, the market has seen a correction in the last few months, with the share prices of Twitter and Facebook being affected.
A correction’s occurring, he adds, because many new technology and Internet stocks are being highly valued right out of the gate, including those in the private sector.