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How to Handle a Hot Tech Stock

Michael Comeau

I've owned a tech stock that's been hot for a while and I'm getting antsy. How do I determine whether it's as big as everyone else feels it is? - D.S.

Generally speaking, the technology stocks that can sustain their momentum longest are those with a difficult-to-unseat proprietary technology that is accepted as a standard within the marketplace. These are the types of companies that have the best chance of sustaining strong profit margins over the long term, and to which investors will award premium valuations .

One example would be Dolby Laboratories DLB, a current pick in the TheStreet.com Breakout Stocks newsletter. Dolby is the de facto standard in surround-sound technology, which is included in thousands of consumer electronics products sold each year. Since the marketplace accepts Dolby as a standard, electronics manufacturers have no choice but to use Dolby's technology. This gives me a great deal of confidence that Dolby can sustain its fundamental momentum over the long term.

Now when it comes to the tech stock in your portfolio , ask yourself the following questions:

1. Is the company's technology accepted as a standard within the marketplace?

2. Are there barriers to entry to getting into the company's market?

3. Is it difficult for customers to switch to a different technology?

If the answer to all of these questions is yes, then your tech company is probably on the right track towards sustaining its momentum over the long term. However, if the answer to one or more of the questions is no, then you will want to be conservative when looking at that particularly stock. For example, a company like Motorola MOT makes products that can easily be copied or replaced, so you should have less confidence in the company's ability to generate the type of long-term growth that commands a premium valuation.