2022 was a terrible year to be a technology investor.
Since the Great Recession, big-tech stocks had driven the market higher. And many investors were not prepared for this unexpected 180-degree shift.
Tech’s 30%-plus drop last year scared people off investing in the industry as a whole. But looking ahead, I predict a major shift back to technology.
The fact is unless there is a nuclear war, technology will now always be an essential need and want in the 21st century.
And as is always the case when investing in long-term trends, you need to find the leaders creating the essential goods. That’s what allows them to keep a steadily increasing cash flow.
At Intelligent Income Daily, we’re focused on guiding you to safe, reliable income-producing plays that’ll help you sleep well at night. And that includes resilient tech stocks that deliver on strong long-term growth trends and strong shareholder returns.
Today, I’ll share with you how this market has solidified my belief that the technology growth story is far from over… and how to safely maintain exposure to resilient tech stocks in your portfolio.
Don’t Join the Irrational Herd
First, let’s get to the bottom of why tech stocks performed so poorly last year.
In short, rapidly rising interest rates crushed the multiples attached to long-duration risk assets. These multiples measure an asset’s performance, estimate their value, and compare them to their peers.
And tech is the sector with the most speculative valuations.
Everyone wants to get in on the next Microsoft or Apple in its early stages, but those companies are long-established.
Instead, people aimed to get in on the ground floor of the next Microsoft “wannabe” technology companies. Many of these offered products no one yet needed or truly wanted.
Companies were popping up left and right in 2021. According to the U.S. Census Bureau’s Business Formation Statistics, 2021 broke the record for new start-up companies for the second year in a row by a huge margin.
But when Russia invaded Ukraine in early 2022, WWIII became a very real possibility and speculative technology that once seemed cutting edge was no longer essential to investors.
This helped trigger the “scary tech selloff” of Apple, Amazon, Alphabet, Microsoft, and Meta. And over the course of 2022, we saw the Nasdaq drop by 33% and the Information Technology sector within the S&P 500 go down by 29%.
But thus far in 2023, tech stocks have been the leaders of the stock market rally.
The Nasdaq is up nearly 18% this year. For comparison, the broader market indexes S&P 500 and the Dow Jones Industrial Average are up by 9.8% and 3.3%, respectively.
This doesn’t surprise me. And I believe this outperformance is something we’ll continue to see…
Big Tech as a Defensive Investment in the 21st Century
Every day, it seems I wake up and see another negative headline regarding macroeconomic growth and how bad the recession is going to be.
And yet, during 2023 tech stocks have led the market.
Why are these stocks winning?
Firstly, they sold off to irrationally low levels during 2022. And second, the long-term growth and strong cash flow generation prospects these types of companies offer provide investors solace during potential bear market periods.
Think about this…
Historically, areas of the market such as Consumer Staples, Healthcare, or Utilities have been some of the most defensive sectors during tough economic macro conditions.
For example, no matter how bad the economy gets, you still have to buy things like food, toothpaste, and toilet paper.
This is why stocks such as Coca-Cola, Colgate Palmolive, and Kimberly Clark are all Dividend Kings, meaning they’ve grown their dividends for at least 50 years.
Well, in the digital age, I’d argue investors can expect the same sort of reliable cash flow growth from the entrenched, big-tech stocks.
That’s because the 21st century tech long-term growth trend isn’t going anywhere. Just like we need our favorite food and hygiene products, we need reliable tech to communicate and work.
And the best tech picks are benefiting.
Companies like Apple, Microsoft, and Alphabet dominate broad market indexes…and rightfully so.
They offer unparalleled cash flows, have fortress balance sheets, and generously reward their investors with shareholder returns.
Microsoft ended its most recent quarter with $104.4 billion of cash/cash equivalents on its balance sheet. Alphabet had $115.1 billion. Apple had the largest cash position at $165 billion.
Figures like those allow these companies (and their shareholders) to weather financial storms.
And we’re not the only ones who think so.
Even Warren Buffett, whose most famous holding position at Berkshire Hathaway was Coca-Cola for years, has re-tooled the Berkshire portfolio by investing heavily into one technology stock.
At the end of last year, Apple (AAPL) shares made up 38.9% of Berkshire’s portfolio. That makes it Buffett’s largest holding.
Berkshire’s Apple stake was worth $116.3 billion, nearly 5x the size of its $25 billion Coca-Cola position.
And during Q4, Buffett added another 333,000 shares of Apple.
That shows us one of the most successful investors in the world believes this trend isn’t going anywhere. Just like Coca-Cola, there’s simply no substitute for the best of the best tech products… and their stocks.
That’s exactly why I believe you should use dips to buy companies like this.
They have resilient products, strong margins, and established consumer bases. And buying shares – and enjoying the dividends – of this long-term trend in 2023 and beyond will allow us to sleep well at night.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
P.S. At Intelligent Income Investor, we follow the most compelling long-term trends when selecting recommendations for our model portfolio. And right now, we have a handful of other resilient, dividend-paying tech plays. Though they’re smaller than Apple, we believe global catalysts will benefit these plays and take them much higher in the coming months. To learn more about them, click here.