This is the 12th piece in Seeking Alpha's
Positioning for 2014
series. This year we have once again asked experts on a range of
different asset classes and investing strategies to offer their
vision for the coming year and beyond. As always, the focus is on
an overall approach to portfolio construction.
Ashraf Eassa is an investor and financial writer with Bachelor's
degrees in Computer Science and Mathematics. He spends his days
looking for compelling investment ideas, particularly in the
technology sector, and strives to bring these ideas to his nearly
7300 followers on a daily basis. When he's not knee-deep in the
markets, he can be found reading books on the latest-and-greatest
hardware software technologies and whipping up applications for
both the PC and ultra-mobile devices.
Seeking Alpha's Abby Carmel and Jonathan Liss recently spoke
with Ashraf to discuss the big trends in technology investing in
the coming year and beyond.
SA Editors ((
How would you describe your investing philosophy, broadly
Ashraf Eassa ((
I'd describe myself as a value investor with an eye towards
technology. I know that's somewhat of a contradiction, particularly
given that many successful technology investments tend to look like
anything but value stocks, but understanding a situation and
leveraging knowledge of technology and potential industry trend
shifts can be very helpful in distinguishing between "values" and
As we approach 2014, are you bullish or bearish?
That's a toughie. I think 2014 will be a stock picker's market. The
market as a whole may not see as nice a run as we saw in 2013, but
there will be ample opportunity to take advantage of individual
names that could generate quite healthy returns - well in excess of
what I believe the general market will bring.
What are the big trends or themes you are focusing on in your
technology investing right now?
Right now, a theme that I particularly like is "consolidation" and
how best to profit from it. We saw a lot of consolidation in the
flash/SSD space over 2013, particularly as Seagate (
) and Western Digital (
) really went on an acquisition spree. I think we'll see more
consolidation across the broader technology spectrum, particularly
in the semiconductors. Already this year two of my Top Ideas - LSI
and Spreadtrum - were taken out at pretty hefty premiums. I expect
to see much more of this next year.
Another idea I like is simply trying to take advantage of
cyclicality in a number of tech areas. Mellanox (
), for example, seems set to rise pretty nicely as the HPC market
sees a cyclical upturn. I'm also pretty interested in the sapphire
plays - namely GT Advanced Technologies (GTAT) and Rubicon (RBCN) -
especially in light of what Apple (AAPL) could be doing with
sapphire. A broad industry shift to that material could mean very
good things for both of those stocks - even after the deal Apple
signed with GT.
How do you identify major trends ahead of the crowd by investing in
companies that have the potential to become tomorrow's Intel (INTC)
To be perfectly fair, I don't think I've ever actually identified
an opportunity that lucrative. That said, trying to identify the
next "big thing" is about understanding not just the technology but
the potential need. Why did smartphones succeed so brilliantly? It
was because people needed the ability to access data and
communicate in a way that had been previously restricted to the PC
via a limited Ethernet or Wi-Fi connection.
An investor that can identify a technology that fundamentally
makes people's/customer's (remember, there are game-changing
technologies outside of the consumer space) life easier/better is
an investor that's probably going to strike it rich.
How is stock picking in the technology sector different than in
Investing in technology stocks is really about identifying broad
trends, understanding product cycles, and being able to sort of
"guess" what people will get excited about. Oftentimes the big
runners in tech run not on "earnings" per se but the excitement
over that particular opportunity.
On the long side, if you can identify a company that could
eventually strike it rich on a very real opportunity, then getting
in before the hype starts to kick in is usually a great way to make
money. Watch out, though, because great short opportunities are
made by people taking one "good" data-point and extrapolating it
out to infinity. Be very careful to not confuse a cyclical top with
the first innings of a true secular growth story.
Can you buy good technology companies at attractive prices
Yes, but it's tough. In this environment, value is concealed, so
the focus needs to turn more on trying to find businesses near
cyclical troughs as well as "special situations." Will the momentum
names work? Maybe, but frankly, I'm much more interested in
shorting momentum names with interesting catalysts than trying to
play the game of hot potato.
You tend to concentrate on and invest in a small number of stocks -
Honestly, I think this is more due to limitations of time than
anything else. When I make a transaction (long or short), I want to
know that company's story inside and out. I want to know what
investors are concerned about, what they're hopeful for, and want
to be able to find ideas where the weighted average of the possible
outcomes favors the position that I take.
I think spreading yourself too thinly and trying to understand a
bunch of different sectors and individual stocks within those
sectors really dilutes the quality of the research, the confidence
in the position, as well as the returns (but of course, this is
just what works for me - Stephen Simpson, a very prolific
generalist who does very well in the markets, would likely
Tech companies have lately been undergoing a transition from
growth-focused entities that generally plowed all additional cash
into R&D to value-focused dividend payers. What does this say
about the future growth prospects of the tech sector and is it
ultimately bullish or bearish for stock prices?
It's my view that R&D is the lifeblood of any technology
company. Now, I think that for larger, well established players
operating in secular growth markets, there's less of a need to plow
all of that excess cash into R&D. Eventually, particularly in
tech, a company "tops out" and the value gained from each
incremental R&D dollar may not be worth it.
So, if you're, say, Microsoft (MSFT), then more buybacks and
more dividends probably do better for shareholders than a massive
spike in R&D, since at that point there's probably so much
"dead weight" and R&D inefficiencies there that it just
wouldn't be worth it.
A small cap tech company with a great idea and is growing like
gangbusters, on the other hand, should be investing as much as it
can to maintain its unique technological edge. While these
companies can't all be the next Microsoft or Intel, they can
certainly grow substantially (delivering many hundreds of
percentage points of returns for investors) and/or end up being an
attractive take-over target for giants.
Cloud computing continues to represent a significant opportunity
for technology investors. How should investors capture the
tremendous growth potential in cloud computing and software as a
Oh, cloud computing? Bet on hardware and infrastructure. There's a
massive cloud build-out that benefits just about anybody that makes
networking and server components. Names I like here are
INTC,Broadcom ( BRCM), MLNX,EZchip ( EZCH), andMarvell ( MRVL).
As far as SaaS, I tend to think that many of the names are
simply in a bubble, so I'm avoiding it for the most part.
Would you advise buying tech ETFs?
If you don't have the time to do the detailed work on an industry
and the various names in that particular industry, then ETFs are a
great way to go. These allow investors to bet on broader industry
trends without all of the stress of needing to pick the "best"
plays within a sector.
That being said, if you can afford the time to do the work,
individual stock investing can be much more rewarding than
investing in ETFs.
What advice would you give to a 'do-it-yourself' tech investor
looking at opportunities in the present environment?
Understand the sector you want to invest in and understand the
"story" behind each company. I don't mean the party line you see at
investor/analyst days, but I mean all of the ugly warts as well as
the positives. Listen to conference calls, figure out what makes
the company/stock tick and what events/catalysts could drive
In particular, when it comes to tech, look for companies that
have "issues" that can eventually be resolved. For example, one of
my more successful calls - Logitech (LOGI) (which more than doubled
from the initial call) - was a PC peripheral play that was
suffering from intense competition, market-share loss due to
negligence in a number of areas, and a complete misunderstanding of
the pace of the growth industries it was trying to play in.
Once it was clear that these issues were solvable and once it
was clear that management really understood those problems, it was
the time to buy. Not all companies with "issues" are good buys, but
if the management team is competent, the balance sheet is in decent
shape, and the company itself is equipped enough to actually
compete profitably, then there's a good bet that you can make some
real money on them.
Any additional considerations you'd like to share with readers as
they ponder their investing strategy in 2014 and beyond?
Do your research and always question claims that people make. Not
just your peers in the comments sections, but professional analysts
and even myself. Sometimes, there's real money to be made in
identifying a fundamental misconception that the rest of the market
eventually realizes. However, this is exceptionally tough and
sometimes "obvious" folly on Wall Street's part isn't always as
"obvious" as it seems.
Long: NVDA, BRCM, UTEK, INTC, PSMI, RFMD, IGNMF. Short: AMBA
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