Picking Stocks for a Tech Portfolio
In TheStreet.com Technology Report, my goal is to help investors find prudent investment and trading strategies in the companies that are helping our economy increase its productivity. I want to describe the thought processes and methodologies I use to identify and recommend stocks for a long-term technology portfolio, as well as for shorter-term trades -- both long and short positions.
I have been focusing on the technology sector since 1999 in the belief that the New Economy would be focusing on tech stock leadership in the 21st century. Through the period of the tech rise and fall, I advised clients on investing in this volatile sector. Since that time, beginning in the second half of 2002, I have been targeting the technology stocks I believe are likely to be the leaders in the next cycles of product interventions, enjoyment and increased productivity in our personal lives and in the workplace. The key technology industries of growth and technology leadership, I believe, are computers, semiconductors and software.
My background and experience are much broader, however, than just the tech sector. I've traded U.S. Treasuries and federal agency securities; formed a consulting company producing reports covering the technicals of U.S. capital markets; and I am currently the chief market strategist at Joseph Stevens & Co., a regional brokerage firm with its main office in Lower Manhattan.
My methodology for picking technology stocks is largely based on fundamental analysis, but not from a pure "bottoms up" approach. Because I cover hundreds of technology companies, I use several tools to define the universe of tech stock candidates, and to identify which stocks I believe should be in a top-performing technology portfolio.Proprietary Models: I believe that stock screening of fundamental data and viewing weekly chart patterns are equally important in measuring a stock's risk / reward. The difficulty with interpretation arises from the fact that when all factors are equal, a stock becomes more fundamentally positive when the price of the stock goes down and less fundamentally positive as the price of the stock goes up, but that the opposite is true when viewing a stock's weekly chart pattern. When the price of a stock is moving higher, the technicals tend to improve; and when the price of a stock is declining, the technicals tend to deteriorate. This makes combining the two disciplines difficult, but in my opinion, necessary. Behind the scenes of TheStreet.com Technology Report Model Portfolio, I use a technical-based screener to find technology stocks that trade above $10 a share (with a few exceptions) and are at least 20% undervalued according to his valuation measures. A company's fair value calculation is based upon a company's trailing 12-month earnings per share (EPS), the analyst consensus estimate of the company's forecasted 12-month EPS and the 30-year Treasury yield. I began developing my technical analysis models in 1984, designing them to help me evaluate the risk/reward for markets over a rolling six-month horizon. My models are based upon a matrix of the past nine closes over the following time horizons: daily (D), weekly (W), monthly (M), quarterly (Q), semiannual (S) and annual (A). In my judgment, the evaluation of nine years of closes builds in the summation of all bullish and bearish events that is necessary to project future volatility, including supports, pivots and resistances. Bearish fundamentals may cause market weakness to support levels. Bullish fundamentals may cause strength to resistance levels. Pivots tend to act as magnets that, according to my observations, often have about a 75% chance of being tested during their time horizon. For example, if a stock falls below a quarterly support, it has about a 75% chance of returning to that prior support before the end of the quarter. My proprietary analytics assume that nine years of closes are enough to incorporate all possible bullish and bearish events that cause volatility in any market. While my proprietary technical screeners work behind the scenes to help identify model portfolio candidates and trade ideas, all of my specific recommendations are based upon fundamental reasons such as the company's earnings report, guidance, product announcements and specific industry statistics or events. Stocks in my long-term technology stock model portfolio are core holdings recommended for three months or more. Stocks in my short-term technology stock model portfolio are recommended for a period of five to 60 days. Short recommendations are limited to five to seven positions with a specific buy-stop parameter and for a time horizon of at least five days. TheStreet.com Technology Report will concentrate on three industries: computer hardware, semiconductors and software. I also include a tech hotspot category to include any other technology companies. During the week, subscribers receive email alerts with specific recommendations to take action on immediately or at a specific price level. These alerts will add or delete model portfolio members, or provide guidance on adding to or subtracting from model positions. Subscribers also receive a Technology Report Weekly Roundup providing a Market Overview, Tech Stocks in the News, Alert Log, Ratings Upgrades and Downgrades, Status on Longs and Shorts, and Stocks on the Radar Screen. Based upon my behind-the-scenes proprietary models, stocks are rated ONE, a stock that is a buy right now; TWO, a stock that is a buy on a pullback; THREE, a stock that is a sell on strength; and FOUR, a stock that is a sell right now. All of the above, I believe, will help investors trade and manage a portfolio of technology stocks, using both long and short strategies. Being long technology stocks can be quite risky, but the rewards can be significant if you hold a portfolio of stocks that has the potential to outperform the Technology SPDR (XLK) and the S&P 500 SPDR (SPY).
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