You have probably heard that tech stocks are outperforming the already amazing market returns we have experienced since March. In fact, as a whole, the tech sector was up 24% over the last 90 days as of the time of this writing. Compared to the 12.6% return on the S&P 500, that is very impressive.
Tech stocks that benefit from the changes in economic and consumer behavior following the COVID-19 pandemic have performed even better.
But we think they have more room to run this year.
First, in a low interest rate environment, capital is cheap, and investors are reluctant to buy bonds or other assets with virtually zero yield. As other economies struggle, tech stocks in the U.S. and Europe look far more attractive by comparison, and capital flow should accelerate through the end of the year.
Second, the shift to remote work, the prevalence of distance learning and innovation trends like 5G will create short-term earnings growth for tech stocks. That kind of growth will be rare in other sectors this year.
Not all tech stocks are created equal, and some may have headwinds and threats from regulation that could be an issue. In particular, we are concerned about social media companies, internet service providers, and streaming entertainment firms.
We have three suggestions to profit from the tech sector in the short term, and all three will add an all-too-rare growth component to your portfolio.
But as bullish as we are on these stocks, ongoing international trade disputes and the COVID-19 pandemic have created a lot of economic uncertainty.
Fortunately, our focus on hedging and income-based trading gives us an additional edge in this sector.
One of our long-time favorite stocks, Microsoft (MSFT), leveraged its position in cloud computing, and business capital investment despite uncertainty in the global economy.
Growth in MSFT’s Azure cloud products has slowed a little, but revenue in that segment has still grown a blistering 47% on a year-over-year basis. And we can’t stress enough that MSFT’s overall revenue grew by 13% on an annualized basis according to its July earnings report.
But we don’t want to get ahead of ourselves.
MSFT may own many of the software and cloud products needed to support working from home. And it may be one of the few firms to report growth in the most recent quarter. But there are some important X-factors to consider, including the unknown economic impact of the COVID-19 pandemic this fall and early winter.
This is where our focus on income-based trading rather than a long position in the stock gives us an edge.
For example, just before earnings, we recommended that traders sell a put write on MSFT with a strike price of $200. Traders who took our recommendation collected $6.40 per share, or $640 per contract, in instant income.
We earned over $600 just for being willing to buy 100 shares of MSFT at $200 per share if the buyer chooses to exercise their option.
After 15 days, we decided to lock in our gains. We recommended “buying to close” the short options, and traders paid $183 per contract. That means that in 15 days, we earned $457 per contract, and we didn’t have to pay thousands of dollars to buy shares of MSFT.
And it doesn’t end there. We’re watching MSFT, waiting for the perfect time to generate even more income. This time, you can have the chance to get in on the action as soon as we get the green light. Click here to find out how simple seeing gains like this can be.
Of course, it is always possible our puts may be exercised, but that’s why we sell puts with a strike below the current stock price. If the option buyer exercised their right to sell us 100 shares of MSFT at $200 each, we would be buying the stock at a price lower than it was the day we opened the trade.
And we only deploy this strategy on stocks we would want to own anyway.
MSFT has one of the most defensible market positions to attract traders looking for a shrinking list of quality growth stocks, and it is uniquely poised to profit from permanent changes in the way people all over the world work, go to school, and communicate with each other.
Speaking of communication, unless you have been hiding in a cave, you probably know two things about 5G technology.
First, it will bring beyond-broadband internet access to devices and locations we have only dreamed about.
Second, one of the market leaders in 5G devices, Huawei, is being locked out of or heavily restricted in important North American and European markets.
This shift gives other companies in the sector an opportunity to recapture market share and build an important lead in this exploding industry.
In this sector, we favor Cisco Systems (CSCO), a long-time favorite of ours with limited exposure to the 5G sector presently, and Ericsson (ERIC), the Swedish communications giant that just installed its first U.S.-manufactured 5G base station for Verizon.
While ERIC is more exposed to the 5G sector, CSCO is a more consistently profitable company.
In either case, the opportunity to benefit from the boom in communications and the collapsing market share of Chinese firms makes us feel that this is one of the most important categories in the large-cap tech group.
As with MSFT, we think the risks in this group can be managed by focusing on option income rather than trying to predict the exact moment to buy the shares.
Uncertainty is high right now, which means option prices are also elevated. Traders can use a covered call strategy called a “buy write” to take advantage.
In this scenario, investors buy the stock and simultaneously sell short calls for an instant cash payment. The option income offsets their potential losses if the stock dips, and if the stock rallies above the call’s strike price, investors keep the income and sell the shares at a potential profit.
We have been using a similar strategy for several months now on CSCO, which has allowed us to recoup our losses from the February 2020 crash much more quickly.
For example, we recently recommended investors sell calls on CSCO with a strike price far above CSCO’s current stock price. We earned $48 per contract from these calls alone. Those calls expired out of the money, meaning we got to keep that income and our CSCO shares.
We’re always hunting for creative trading opportunities like this — there are all kinds of recommendations that could lower risk and increase potential upside. Click here to make sure you don’t miss out on the next one.
We plan to keep selling calls on CSCO as long as it’s in our portfolio. That steady monthly income can do a lot to smooth out the bumps you can see in the chart above, and it helps help us remain patient as we hold the stock for longer-term gains.
While it may seem like this is a tough market to look for any surprise winners, we think there are a few stocks with a chance to break higher that may never appear again.
For some of these, managing the trade with option income may be more difficult, but we feel that including small, riskier positions like this is an important part of an overall portfolio strategy.
One stock we’ve been watching recently may surprise you – and you may not even consider it a tech stock.
Chegg, Inc. (CHGG) is the leading U.S.-based distance learning company. A cross between an online education company, social media firm, and freelance consulting firm, CHGG has name awareness above even Amazon and Google for educational products and services among college-age adults.
CHGG’s subscription services include live online tutoring, writing tools, homework help, and textbook sales, and they grew by 29% in 2019. They are expected to grow their gross margins by 67% in 2020.
As much as we might not have welcomed the transition to distance learning, it is likely here to stay for a while. Companies like CHGG that have a nearly insurmountable lead in providing services to this market, which should make them very profitable picks for investors.
Amongst the market leaders, we believe tech is the most likely to sustain its gains through the r est of this year. But the focus has to be on companies that benefit from low interest rates and shifting consumer and business behavior. In that respect, we think this is an inflection point where the new (or in MSFT’s case, continuing) market leaders are emerging with once-a-decade profit opportunities.
And if you want the chance to take advantage — not just in technology, but across all sectors — we’ve got just the solution…
Through Strategic Trader, you can receive the best opportunities each and every week.
You’ll know exactly when and how to get in, get out, and maximize your profits along the way — for up to $17,760 in extra income per month.
All the details on how to get started are right here.
John Jagerson and Wade Hansen
Editors, Strategic Trader