How to Handle a Hot Tech Stock

Editor's note: Ask TheStreet is designed to answer questions about the market, terms, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment- or stock-related advice.


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.

In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Comeau is a research analyst at TheStreet.com. In this role he performs stock analysis for TheStreet.com Breakout Stocks, and is also a regular contributor to RealMoney.com. Prior to his arrival at TSC in June 2004, Comeau worked as a Consultant to Toyota Motor North America, performing in-depth research on automotive industry issues, primarily in the areas of alternative engine technologies, competitive analysis and macroeconomics. His primary market interests include consumer technology, specialty retail, and small-caps. Comeau received a bachelor's degree in Finance from Brooklyn College, and has completed Level 1 of the CFA program. He appreciates your feedback; click here to send him an email.

More from How-to

How to Have Great Travel Adventures on Your Own

How to Have Great Travel Adventures on Your Own

How Much Do Accountants and CPAs Make?

How Much Do Accountants and CPAs Make?

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

How to Trade Stocks

How to Trade Stocks

How to Use Bitcoin for Purchases

How to Use Bitcoin for Purchases