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Tech Stocks: Where the Opportunities Are Now

Slide 1: Tech stocks seem poised for strong performance

The tech sector seems ripe with opportunities for investors. Since the recession of 2008–2009, tech stocks have outperformed the broader stock market, notes Brad Sorensen, managing director of market and sector analysis at the Schwab Center for Financial Research. Looking ahead, Brad believes the tech sector has the potential to continue to outperform over the next three to five years. Let’s take a look at the factors that are bolstering tech stocks—and where attractive options may be for investors now.

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Slide 2: Look beyond the big names

First, if you’re looking to expand your portfolio of IT stocks, it’s important to look beyond the marquee names and consider companies that may have lower profiles but serve critical, high-growth needs, such as B2B software-as-a-service providers and telecom equipment manufacturers, Brad notes. Many companies in the technology ecosystem fly under the radar of the news media, but because they provide essential components for enterprise technology systems, these tech stocks can offer growth opportunities for investors.

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Slide 3: Seek companies with strong fundamentals

Tech stocks offer some key advantages for investors: stronger balance sheets now, as compared with the days of the dot-com bubble, and increased demand from businesses and consumers. “Many technology companies today have low debt and high cash reserves,” says Brad. Also, he notes, during and following the recession many companies underinvested in technology—and are now making significant upgrades to improve productivity and protect their data. When expanding or rebalancing your holdings, focus on companies with strong business models and cash flows.

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Slide 4: Buyers shift toward services

“Business consumers are shifting from hardware and more toward software and services that can create greater efficiencies,” says Peter Wahlstrom, director of equity research, global technology, media and telecom at Morningstar. In particular, providers of social, mobile, analytics and cloud (SMAC) software and services are increasingly in demand. The number of networked and mobile devices alone has more than doubled to 15 billion over the past five years, according to Gartner research. Software as a service—subscription-based software for which users pay a monthly fee, rather than a onetime installation charge—is also growing. 

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Slide 5: Big data is becoming big business

It wasn’t so long ago that businesses could get by using mere spreadsheets to analyze their data. But as digital advances have increased customer contact, the amount of data that companies collect and store has risen dramatically. Today, companies interact with customers through phone calls, online chats, social media posts and more—and are using sophisticated software to help them analyze the resulting trove of information, says Brad.

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Slide 6: Incorporating tech stocks into your portfolio
Technology stocks tend to be part of the growth portion of your equity holdings. That said, a sector-specific investment strategy, such as a focus on technology stocks, should generally represent only a small portion of your overall portfolio. It’s also wise to diversify within your tech holdings to help manage risk. For example, take a look at the variety of industries represented in the technology portion of the S&P 500® Index (above). 
 
In addition, investors should plan to keep their tech stock holdings over a full market cycle, such as three to five years, to reach their objectives of long-term growth, Brad suggests.
 
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Slide 7: What you can do next
If you plan to increase or change your technology holdings, exchange-traded funds and mutual funds can provide you with a cost-efficient, diversified approach to investing in technology stocks. 
 
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Important Disclosures

Investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by visiting Schwab.com or calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.

Since a sector fund is typically not diversified and focuses its investments on companies involved in a specific sector, the fund may involve a greater degree of risk than an investment in other mutual funds with greater diversification.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, an offer to sell, or a solicitation of an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request.

Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc.

The S&P 500® Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

The S&P 500® Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the GICS® information technology sector.

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