|P E T E R S. C O H A N & A S S O C I A T E S|
|TECHNOLOGY INVESTMENT DASHBOARD
Warren Buffett famously claimed that he does not invest in technology companies because he cannot understand them. As the performance of the NASDAQ since 1995 demonstrates, investing in technology is a place where trillions can be made and trillions can be lost. The performance of technology stocks I picked on CNBC since 1997 has been excellent. To make winning picks and avoid losers, the Technology Investment Dashboard (TID) is a useful tool.
Before investing money in technology companies, it is crucial to invest time. The TID suggests a way for investors to spend that time. The TID identifies six factors that investors should analyze before deciding whether or not to invest. Much of the information needed to analyze these factors is available online through sites such as the SEC's Web site, Yahoo Finance, and Microsoft Moneycentral.
Industry Attractiveness is the profitability of the industry for the average participant. Industries vary in their average profitability. Pharmaceuticals, for example, has generated average returns on equity of 25% while coal has earned returns of 2%. For investors in technology, it is important to first identify the market sector in which the firm competes and then to track the profit margins and return on equity of all participants in the sector. If the margins and returns for the average company are high, the investor should continue with the analysis. If the average participant is losing money, then the investor should not invest.
Competitive Position is the relative market share of the company within the industry. Investors are generally better off buying stock in market leaders. Investors should also investigate the activities that determine relative market share in the industry and assess how well the market leader performs these activities. For example, in the Internet security industry, leaders focus on making sure their products work well with many other technologies and certifying that they are difficult for hackers to break. Investors should research such factors and assess whether the current market leader is good enough at important activities to maintain their leadership.
Managerial Integrity and Adaptability can be measured by analyzing a firm's accounting policies, legal position, and ability to generate consistent earnings performance. Investors should particularly focus on whether the firm's revenue accounting policies are consistent with generally accepted accounting principles and whether the firm is a target of unusual lawsuits. If a firm does not comply with standard accounting policies or is a defendant in unusual lawsuits, investors should be wary of management's integrity. Furthermore, if the company is unable to generate consistent earnings performance, investors should question management's ability to adapt effectively to changing market conditions.
Brand Family is an assessment of the quality of the relationships that a company fosters with customers, partners, and employees. By analyzing the quality and magnitude of a company's relationships, investors can determine how compelling the firm's brand family is. If a company has a strong brand family, it is more likely to be in a position to build on these relationships to increase revenues and profits. If the firm's brand family is weak -- particularly if it touts relationships with well known customers or partners that ultimately prove insignificant -- then investors would be wise to stay away from investing in the company.
Operational Effectiveness helps investors assess how well companies use their resources. Investors can measure operational effectiveness by comparing a company's sales per employee, profits per employee, and expense ratios (such as sales, general, and administrative expense as a percent of revenue) to other companies in the industry. If an investor finds that the company is more productive than its peers, the investor should continue to analyze the investment opportunity. If not, the investor may not wish to invest in the company.
Relative Market Valuation can help investors determine whether a company is under- or over-valued relative to its peers and its earnings potential. Investors can assess a company's relative market valuation by comparing the company's ratios such as price/sales, price/earnings, price/book value, and price/cash flow to those of competitors and to forecasted growth rates in sales, earnings, book value, and cash flow. If the price ratios are lower than the forecasted growth rates and than competitors' ratios, then investors may conclude that the company's stock is under-valued. Conversely, if the ratios are higher than the forecasted growth rates and than competitors' ratios, then the company's stock may be overvalued.
In general, investors should invest a limited amount of their portfolios in technology stocks. Investors should only invest these limited resources in technology stocks that pass all six tests. Much more detailed information about TID is available in e-Stocks.
PUBLICATIONS AND EXPERIENCE
TV, RADIO AND CONFERENCES
NEW VENTURE DEVELOPMENT
|TECHNOLOGY INVESTMENT DASHBOARD|