Eventually there will be another bull market, and it’s always a good mental exercise to play the “what will lead the next bull market when it comes” game. Right now it’s particularly tough, since everything in the economy seems so miserable.
The two easiest answers are “natural resources” and “tech.” We’ll skip resources for now, but if commodity prices from last year represent some norm for when the world economy is humming, then it’s easy to imagine these stocks roaring higher.
Tech, meanwhile, is always a popular guess. Tech and economic growth are inherently connected. Tech drives human progress and lifestyle advance. Tech is inherently on the cutting edge.
Tech also includes some amazing long-term winners that have led great bull runs. What’s more, today’s tech stocks have some of the best balance sheets around — a particularly positive attribute at a time when investors are going over corporate balance sheets with a magnifying glass (or at least trying to, if there’s enough transparency).
But it will likely be different this time.
The problem is that the current crop of publicly traded tech companies is getting long in the tooth, and the companies at the cutting edge of tech aren’t public, nor are they likely to be anytime soon.
When Microsoft, Intel, Cisco, Apple, Oracle and Yahoo all came public it was a long, long time before they were household names. But they were mostly legitimate businesses, with sales and profits early on (Yahoo not so much).
This is the opposite of the current situation in tech. In the Internet sector, for example, Facebook is arguably the one unalloyed post-Google hit. But despite its ubiquity, it’s not obvious that it’s going to be a great business. By the time Facebook goes public, if it eventually does, it may have already taken a down VC round, while fending off scrappier, upstarts.
If you think that tech will lead the bull market, you actually have to think about specific stocks. And most of the big public companies are now getting disrupted, rather than the other way around. Do you really think Oracle and SAP, with their bloated, uber-expensive and buggy installations will lead the next boom?
Or Microsoft. Just a few years ago it was an alleged monopolist, and people feared it would come to dominate both mobile and the web. In these areas, however, the company is just spinning its wheels. Microsoft’s core profit engines, meanwhile, Windows and Office, are under assault from Google, netbooks, Apple, cloud computing, and the next generation of simpler, more convenient products.
Of course some tech stocks could be undervalued and see upside from here, and some small public stocks today will turn into big winners down the road. But by and large, publicly traded tech isn’t where the action is. And where the excitement is isn’t publicly traded.
Tech will be a long-term winner if you define it broadly. Innovations in energy tech, food tech, industrial tech and medical tech may help many of the companies around today. GE, for all its faults, has a lot of exciting technology.
But what most people think of as tech–information technology–likely won’t be where the big money is made.