No, This Is Not a Tech Bubble – And You Can Still Profit By Kyle Anderson

The bears are out in full force trumpeting the news that there's a tech bubble, and the steep decline has started. As of today's opening, the Nasdaq Composite has dropped 7.3% in just over three weeks. That drop followed an incredible run where the index climbed 28% from September 2013 through September 2014. The post No, This Is Not a Tech Bubble – And You Can Still Profit appeared first on Money Morning - Only the News You Can Profit From .

The bears are out in full force trumpeting the news that there's a tech bubble, and the steep decline has started.

As of today's opening, the Nasdaq Composite has dropped 7.3% in just over three weeks. That drop followed an incredible run where the index climbed 28% from September 2013 through September 2014.

tech bubbleBut according to Money Morning experts, this is unequivocally not a tech bubble.

For insight, we turned to Money Morning's Defense and Tech Specialist Michael Robinson and Executive Editor Bill Patalon, who combined have more than 60 years of experience analyzing and reporting on the technology sector.

According to both Robinson and Patalon, the recent dip we've seen in the markets is a normal occurrence, not the sign of impending doom. In fact, all the major indexes have hit a rough patch recently, not just the tech-centric Nasdaq.

Since hitting a high on Sept. 19, the S&P 500 has dropped 5.6%. The Dow Jones Industrial Average hit a high of 17,350.64 the same day and has slid 4.7% since.

These tremors could signify a correction in the coming months - but make no mistake - this is not the second coming of the dot-com crash...

What a Tech Correction Looks Like

A stock market correction is defined as a 10% drop from a market's high. A bear market is reached after a 20% dip.

On the other hand, a "bubble" bursting is a cataclysmic crash in the market. At the height of the dot-com crash, the Nasdaq fell 80% in just two years. And it still hasn't reached the highs of over 5,000 points it set in 2000, more than 14 years later.

When the Dow Jones collapsed in October of 1929, it took 25 years for the index to reach its previous peak.

We're not anywhere near that now. In fact, we're still nearly 3% away from a true correction.

And this recent dip in the markets is actually a pattern that Robinson has been expecting all year...

"I predicted this would occur months ago - I said the Dow was going to hit 17,000 and then people are going to panic," Robinson said. "You've gone five years without a major correction and people are a little bit worried. You start to see a small correction and people start to panic."

According to Patalon, investors could end up seeing a prolonged dip in the market, but not a crash.

"It's a possibility that we see a long-term correction, possibly even a bear market," Patalon said. "But this is not the dot-com era all over again."

Here's how the current tech climate differs from the infamous crash of 2000 to 2002...

This Is Not the Dot-Com Crash Part Deux

Right now, one of the biggest harbingers of doom for tech bears is the high valuations that startups are receiving.

Yes, startup tech firms are raising huge sums of money. The ride-sharing service Uber has been valued at $18.2 billion. Airbnb, the online lodging company, has been valued at over $10 billion. The list goes on: Dropbox at $10 billion, Xiaomi at $10 billion, Pinterest at $5 billion.

But during the late 1990s and early 2000s, the valuations were even crazier.

"This is extremely important. In the dot-com era, companies that went public were very young," Robinson said. "I was in Silicon Valley reporting on tech companies at the time. If you had a pulse and business plan you could get investing back then. It's not like that now. The average age of startup companies going public is 10 years now. In 2000, it was just six years."

Besides, it would take a lot more than high valuations to cause a bubble. In order to cause major concern, we would need to see a dramatic decline in financials among major tech companies.

"Signs of a real bubble would be declining sales, declining profit margins, and declining cash flow," Robinson said. "It would be dangerous if we saw on a broad basis, as opposed to an individual basis. For instance, if we see the mobile wave significantly drop, or if we see a lot of big tech companies post major declines in those three areas, then there would be a serious problem."

"In the second quarter, the healthcare industry (which is heavily tech-centric) saw the highest increase in earnings per share, and the technology industry was No. 2," Robinson continued.

Another sign of a healthy sector is the cash companies have spent. Earlier in 2014, Apple Inc. (Nasdaq: AAPL) raised its dividend. Microsoft Corp. (NYSE: MSFT) just announced that its dividend will be raised in January 2015.

"My question to tech bubble bears is 'Why are these tech companies throwing off so much cash?' Robinson said. "The margins on these companies are getting better, not worse. These companies have more cash now more than ever. I don't see the evidence, I see people worrying."

Now that we're past the idea of a bubble, and looking at a possible correction, Robinson and Patalon have both noticed a significant shift within the tech market. You see, money isn't leaving the tech market like bears suggest. But, the money is shifting.

And there's a way savvy investors can profit...

Here's Where the Money Is Moving

"We're not seeing money leaving tech stocks, but we are seeing a shift in the markets," Patalon said. "When people have extra money, they may take a flyer on a small-cap tech stock with huge upside. It's human nature. But when people start to tighten up (like they are right now), they make safer plays and move to large-caps. They want that dividend payment, with the upside that tech stocks provide."

According to Patalon, one of the worst things investors can do is sit on the sidelines. Other investors may be panicking and leaving the market, and by doing so, they miss out on huge gains when the markets turn around. He's seen it time and time again.

The key is picking the right stocks, with strong financials and dividend payouts, when they are trading at discounted prices.

Many large-cap tech stocks, like Microsoft and Apple, offer steady dividend payments and a way to play the tech market. They won't see the massive gains that small caps sometimes can, but they won't be hit as hard by a correction either.

And following a bull run like we've seen over the past five years, many of these tech firms are flush with cash.

"For investors, it's a great sign that these tech companies are either offering dividends for the first time or boosting them," Robinson said. "Apple is boosting dividends. Big caps are sending cash to shareholders, which is a sign of a healthy market."

Editor's Note: The headlines last week were filled with news about eBay Inc.'s(Nasdaq: EBAY) plan to spin off PayPal as a publicly traded company in 2015. But the truth is the really big story here - and all the profits that will come with it - was missed. Until now...

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The post No, This Is Not a Tech Bubble – And You Can Still Profit appeared first on Money Morning - Only the News You Can Profit From.

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