5 Best Tech Stocks to Buy Now for 2020
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Finding the best tech stocks to buy from 2,000+ in the market
If you want growth and returns, there’s no better stock sector than tech. The technology companies in the S&P 500 have doubled the market return over the last five years and it may just be getting started!
In this video, I’ll show you how to find the best tech stocks to buy then reveal the top five stocks for your portfolio. We’re talking top tech stocks to buy today on Let’s Talk Money!
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How to Invest in Sector Stocks
We’re starting a great series of videos today, an idea straight out of a suggestion from one of you in the bow-tie nation.
Over 11 episodes, we’ll be looking at the best stocks to buy but doing it in a way that’s not only going to grow your portfolio but protect it as well.
Now those of you in the nation have heard me say how important it is to pick stocks from each sector of the economy. We’re talking stocks from energy companies, tech, consumer goods and so on. Too many investors get excited about one specific sector like that growth in tech or the dividends in consumer staples, they plow all their money into stocks in just a couple of sectors and get absolutely destroyed in the next bear market.
A lot of times, you may not even realize it’s happening until it’s too late. You might be screening for dividend stocks to buy. You narrow your list and invest, but by virtue of limiting your picks to the top dividend stocks, you might also be limiting your portfolio to those sectors that pay the highest dividends.
This is supremely important and I can’t believe we haven’t covered yet on the channel. Over these 11 episodes, one for each stock sector, I’ll show you how to pick the best of breed in each. We’ll look at some of the big trends and how to pick stocks to buy, then I’ll reveal my five favorite stocks in each.
Now understand, you don’t necessarily need all five stocks in all 11 sectors for a great portfolio. I would recommend putting at least two or three stocks from each sector into your portfolio. I’m also going to show you a couple of exchange traded funds you can buy to get broad exposure to the sectors and share the simple investing strategy I use to get market returns plus a few extra percent every single year.
If you don’t go with any of the stocks in a sector, consider a position in one of the sector funds to get that exposure.
What Stocks are in the Tech Sector?
Here’s that graphic again of the stock sectors and today we’ll be looking at tech including semiconductors, software, storage and internet companies.
How to Find Tech Stocks to Buy
Picking these five tech stocks to buy, I screened for a lot of the fundamentals we’ve talked about on the channel. I screened for companies with increasing revenue and cash flow over the last few years. With the economy growing, this was most companies but it did screen out a few losers in downward trends.
Another factor I looked for, and all of you in the bowtie nation are probably tired of hearing me talk about this one is the operating margin. If there is one single factor you look for in picking stocks, it should be the operating margin.
This is the operating income divided by the total sales for a company over the period, usually three months or a year. So if we look at the income statement here, we see sales or revenue at the top with $259 billion for Apple. After the cost of goods or materials, the statement deducts the costs of running the company, these operating costs.
Now what you get after removing the costs of running the business; marketing, administration, all these costs, is the operating profit, this $64.4 billion for Apple. It’s the truest and best measure for management’s ability of creating a profit from the business. And when you take that operating profit divided by the sales number, you get a profit percentage for how efficient and effective the business is.
The pundits and financial media like to talk about the price-to-earnings ratio and the profit margin. Don’t look at that. The earnings includes the effect of debt and financial leverage as well as accounting tricks on taxes. Analysts look at this operating margin as the real measure of management’s success. When you compare this operating profitability across companies in the same sector and industry, you see which are best run and have those competitive advantages.
I also screened for a positive dividend yield and this is one where a lot of tech investors will disagree. As growth companies, a lot of tech stocks aren’t going to pay dividends. The company is reinvesting every dime for that faster growth and that’s fine, I just like getting a cash return on my investments. I like the cash discipline on management from a dividend. Management can’t throw cash at worthless acquisitions and low-return projects because it has to meet that dividend.
But this is probably one you can leave out if you like and I made an exception for two of our tech stocks. You’ll open up the list to all those companies that don’t pay a dividend and will still find some solid investments.
Beyond that fundamental analysis when picking these tech stocks, I looked for companies with a competitive advantage and catalysts for growth. The truth is, the market already knows which companies have faster revenue growth, which have higher operating margins and all that is mostly baked into the current price.
It’s the competitive advantages and those catalysts that offer the real opportunity for long-term return. These are the companies with pricing advantages, brand advantages and upcoming events that can really boost their stock price.
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Best Tech Funds to Buy Now
I’ll share those five tech stocks I found next but first I want to highlight three tech funds you might also consider. If you can’t find stocks you really like, so if no stocks fit your screening, you might consider putting some money into these funds just to get that exposure to tech investing. Then you can invest in stocks of other sectors like we’ll talk about in the series but still have some of that faster growth from tech.
Our first tech fund is the Technology Select Sector SPDR, ticker XLK. This holds shares of 68 of the largest tech companies based in the U.S. and is pretty well diversified across all the separate industries.
Companies in the fund have an average market cap of half a billion dollars so we’re talking the largest like Microsoft, Apple and Intel. The fund charges an expense ratio of 0.13% which is extremely low and pays a 1.25% dividend yield.
While that XLK will give you broad exposure across tech stocks, this next one is more focused in one of the biggest tech themes right now. The Global X Cloud Computing ETF, ticker CLOU, holds shares of 36 companies offering cloud services and positioned to take advantage of the theme.
These companies are quite a bit smaller with an average size of $100 billion and some are based outside the U.S. so you get some international exposure here. Understand that the expense ratio, that’s the money that gets deducted out of assets each year to pay the portfolio management, that’s 0.68% a year so quite a bit higher but the idea is that these stocks are going to grow faster than the broader tech space as well.
The last fund here before we get to those five tech stocks to buy is the Global X Internet of Things ETF, ticker SNSR, and this one invests in all the companies positioned to take advantage of WiFi, 5G and fiber optics.
This is going to be a huge trend over the next ten years but I feel like it’s a little less well defined compared to maybe that cloud fund or other themes. Here you’ve got 50 companies spread across semiconductors, software, hardware, telecom…really across all of tech.
These are smaller companies with an average market cap of only $26 billion but still established companies. The fund is also on the expensive side with that 0.68% expense ratio but could more than make up for it in growth.
Even if you do invest in a few tech stocks like the ones I’ll highlight now, you might still consider putting money in some of these funds. That’s going to give you the opportunity for higher returns from that individual stock pick but also spread your money out a little across the hundreds of companies in the fund.
Best Tech Stocks for 2020
Our first couple of tech stocks will come as no surprise and are really bellwethers in the space. We start with Intel Corporation, ticker INTC, and its 2.24% dividend.
Despite a really competitive market for semiconductors, Intel has been able to consistently beat expectations. For example, even with PC volumes down 10% on a year-over-year basis in the third quarter, the company reported sales that were $1.2 billion over earlier guidance.
A lot of the strength was on a higher sales price with prices higher by three or four percent across products. And what this means to me, in a really competitive market, is the power of Intel’s brand and competitive advantages, that it’s able to drive that kind of pricing power.
Shares are trading around 12-times earnings which are expected flat over the next year but you can see how management has consistently and easily beaten expectations. The board has increased the share buyback program to $20 billion over the next 18 months so that will drive earnings per share. Intel will benefit from both the cloud computing and internet of things themes and I think this is where the big upside surprises could come from in the next several years.
The average analyst price target on Intel is the widest we’ll see in the tech stock group with a high of $70 and a low of $42 per share. Most of the analysts are grouped right around $60 to $65 a share despite this range. I think the shares could easily go north of $60 each with earnings around $4.98 per share which is about 7% higher than expectations. Add that 9% price growth to a 2%+ dividend and you’ve got a solid double-digit return here.
Our next tech pick is one of the biggest, trillion-dollar Microsoft, ticker MSFT, and it’s 1.4% dividend yield.
Microsoft is quite a bit more expensive than I usually like to buy but just got a huge boost with the Pentagon’s $10 billion cloud computing contract. The company’s Azure cloud platform was already its big growth driver but this contract is absolutely huge. It’s not so much the size of the contract but the fact that this is probably going to open up a wave of federal and state cloud contracts for the company, none of which are priced into the shares yet.
Now of course, Amazon will contest the Pentagon contract in courts and might have a decent case but it’s doubtful this one gets overturned. The rumors are that President Trump sought to influence the Pentagon’s decision because Amazon’s founder Jeff Bezos also owns the Washington Post. It’s going to be tough to prove and even if there is some evidence here, I think Microsoft still comes out with the contract.
Microsoft’s cloud business also landed a $1.8 billion contract from the Department of Defense this year and a $2 billion contract from AT&T with CEO Nadella saying he has a line of sight to many more such deals.
The shares are expensive at 28-times earnings but profits are expected to jump 10% over the next year and, just like Intel, you can see how management is consistently beating expectations. I actually think earnings could top $6 a share over the next year and just keep going from there.
Microsoft is one of the most widely followed tech stocks among analysts and price targets are in a really narrow range here. The lowest target at $155 a share is just over 8% higher than the current price while the top target of $170 per share is almost 20% higher. I did a video highlighting Microsoft in August with a buy recommendation. The shares are up 8% from there and I like that $160 to $170 range for the shares.
Probably the biggest surprise pick and one nobody is watching is Logitech International, ticker LOGI. Logitech is a Swiss maker of computer and mobile accessories and I think could potentially be an acquisition target eventually.
The company makes some of the most popular accessories in the industry. I’ve got two of their products on my desk right now, the Yeti microphone and the c920 webcam which are pretty much both the defacto used by everyone in the blogging and podcasting space. Logitech recently acquired Streamlabs, again the standout leader in its space for video streaming.
So here you’ve got a company leading in its product categories, growing sales and cash flows by double-digits consistently and has a pristine balance sheet with no debt and half a billion in cash…that’s a recipe for some larger player to come and buy it out. The company is just under $7 billion market cap so this would be an easy buy for so many in the tech space.
Shares are trading at just under 20-times earnings which are expected 4% higher over the next four quarters but this stock isn’t widely covered by analysts. With solid consumption in gaming and its other core products, I think earnings could come out around $2.35 per share or higher.
We’ve got just three ranked analysts with targets on Logitech so take this with a grain of salt but that low target is around $36 per share with a high target of $58 per share. I like the growth potential on this one and there’s a good chance we see a big pop someday on a buyout offer.
Now I’ve got two tech stocks that a lot of investors are going to argue with but I truly believe these are the stocks of the future.
Our first one is Alibaba Group, ticker BABA, which is the Amazon of China.
Between all the sites owned by Alibaba, it has almost a monopoly control in Chines online consumption and it’s using the massive data it collects to become a data powerhouse as well. To give you an idea of scale here, just two of the company’s retail platforms, Taobao and Tmall, generated upwards of $909 billion in merchandise sales last year, more than Amazon and eBay combined!
Alibaba is spreading globally much more effectively than Amazon has been able to do, especially across Asia, and the company’s cloud platform has a distinct advantage over Amazon’s AWS or Microsoft’s Azure in China.
Shares of Alibaba trade for 28-times earnings, the data here is in Chinese Yuan so converted earnings are around $6.26 per share, but compare that to Amazon’s stock price of 78-times earnings and Alibaba is a steal. Earnings are expected 19% higher over the next year and this one has decades of growth ahead of it.
Alibaba is widely covered by analysts with a low target of $207 and a high of $250 per share for upwards of 42% return from the current price. This is a long-term must own in my book so if you’re bummed about not being able to buy a share of Amazon for $1,800 each then pick up Alibaba here and wait for it to reach that price.
If Alibaba is the Amazon of China then our next tech pick, Baidu, ticker BIDU, is the Google of the world’s second largest economy.
I love these two China plays because they are the mirror twins of Amazon and Google. Baidu dominates search traffic in China, just like Google, it’s made investments in AI and self-driving, it’s got an online video platform just like YouTube.
It’s basically just copying one of the most successful businesses in history and doing it in what could soon be the largest economy in the world.
Shares of Baidu trade for 15.6-times earnings, again this is shown in Chinese Yuan, and even though earnings are expected lower next year on some divestitures, management has beaten expectations by an 37% on average over the last eight quarters.
Again, take that winning business model, apply it to the Chinese growth story and get it for 15-times earnings versus a cost of 27-times earnings for shares of Google. I think this is another one you can add to your long-term retirement plan and be very happy.
Analyst targets range from $108 per share on the low side to $181 per share over the next year and growth here is really over the next decade or better.
Tech stocks are some of the best you'll find for growth and long-term returns but you have to know how to find the best in the sector. Many tech companies are unprofitable and will be for years. Finding the best investments means looking for the profitable few that are still growing.
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