Posted July 27, 2020
By Ray Blanco
How to Spot a Big Tech Buyout
Tech stocks are getting crazy again!
As the market rebounds from the pandemic crash, a handful of Big Tech names are leading the charge.
And they're dominating the market as they get even bigger.
Shares of Amazon surged higher last week. Thanks to the higher stock price, investors added enough wealth to buy all outstanding shares of Boeing.
Similarly, Tesla's advance added more to the company's market value than the entire market value of Ford Motors in just one day!
These surges for Big Tech stocks are great for investors who already own shares.
But what's next for the biggest tech stocks in the market?
Is Big Tech too big? Is there risk of an implosion? Are there still opportunities left?
Ill explain what we can expect from Big Tech in the second half of this year. And Ill show you some of the best ways to use Big Tech's surge to drive your profits.
Let's take a look.
This Is Why We Don't Invest in "The Market"
As the biggest tech stocks continue to trade higher, the value of a few mega-cap tech stocks now account for a huge portion of the overall market.
The graph below does a good job of showing just how big Big Tech has become.
Right now, the Nasdaq Composite (an index that helps investors allocate wealth to a broad assortment of tech opportunities) is dominated by just a handful of stocks.
At this point, Apple, Google's parent Alphabet, Microsoft, Facebook and Amazon make up a huge portion of the overall market.
The rest of the stocks in the Nasdaq are largely immaterial when it comes to the overall market's performance.
This is important because most investors have chosen not to invest in individual tech stocks. Instead they buy mutual funds or exchange-traded funds like the Invesco QQQ Trust to help them get exposure to the tech industry.
Unfortunately, instead of spreading their wealth among the many great tech opportunities, this approach concentrates most of their investments in these five mega stocks.
There are two big problems with this approach
First, if something bad happens to one of these stocks like an antitrust suit against Amazon or a social media backlash against Facebook your tech investment could take a big hit!
That's because when you invest in the market, you're not diversified into that many areas. Your investment is concentrated into just a few big names.
Second, even when something good happens to one of the smaller tech companies, you probably won't even notice.
Imagine what would happen to the chart above if one of the smaller bubbles doubled in price
The overall picture would barely change!
Think of how disappointing it would be to invest in a company that doubled in price and have it only show up as a rounding error in your overall return.
That's the problem with investing in the tech market as it stands right now lots of risk with less opportunity for truly meaningful returns.
But the growth of Big Tech isn't all bad!
Big Tech is actually creating more opportunity for smaller stock investments if you know where to look
Shares Are Now Buyout Currency!
As the tech industry works its way through the coronavirus pandemic, there is a growing divide between the "haves" and the "have-nots."
Big Tech companies have built tremendous value with both the cash on their balance sheets and the surging values of their stock shares.
Meanwhile, smaller companies even those with excellent products and new tech ideas are struggling. It's just too difficult for them to get access to the capital needed to stay in business and keep growing.
That's where the Big Tech opportunities come into play.
Increasingly, blue chip companies are able to use the value of their stock to fund entire buyouts of rival companies.
We saw a similar situation happen just last week in the energy sector when Chevron used its own shares to take over Noble Energy.
This buyout transaction caused shares of NBL to surge even though the energy industry is still under pressure because of relatively low oil prices.
Imagine how many more tech companies will surge as mega-cap companies like Apple and Amazon start to put their inflated shares to work and buy out smaller rivals.
That's exactly what I'm expecting to see in the second half of this year.
Big Tech companies have to continue to grow if they're going to keep shareholders happy.
That's the only reason investors have continued to pour money into these large-cap tech names. They expect no, demand growth!
But the best way for these Big Tech companies to grow is not to ask employees to keep coming up with great ideas.
No, the best way for Big Tech companies to grow is to buy out other companies completely.
This way, the Big Tech companies can own the new apps, designs and products their rivals are creating.
Then those products can be sold to the existing customer base the Big Tech companies already have a relationship with.
Bottom line: we can expect a flurry of buyout deals as Big Tech stocks use their expensive shares to buy out rivals.
And if you invest in the companies that are being bought out before the deals are announced, you'll be able to profit when these buyout stocks surge higher.