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Are Tech Stocks Partying Like It’s 1999?

By U.S. News & World Report

The U.S. market is reaching new highs in 2017, with Apple (ticker: AAPL) joining the FANG stocks — Facebook ( FB), Amazon.com ( AMZN), Netflix ( NFLX), and Google (Alphabet) ( GOOG, GOOGL) — as significant contributors to the market rally. Comparisons to the dot-com mania of 1999 are inevitable, as is speculation that there is a bubble that is about to burst.

However, there are notable differences between today and 1999, perhaps alleviating concerns about a potential repeat of the market correction that followed the dot-com boom.

Many high profile companies from the dot-com era are no longer in business or are less important, victims of flawed business models or competitive forces. Nokia ( NOK), Palm and BlackBerry ( BBRY) were trend-setters in the early days of smartphones and personal digital assistants, but were unable to retain their market leadership against innovative competitors. Cisco Systems ( CSCO) and Nortel were among the equipment providers that benefited from the rapid growth of the internet, but lost momentum when faced with the dot-com bust and vigorous competition.

Dr. Koop.com, pets.com and the globe.com are among the companies that came public at an early stage of development, perhaps lacking the business plan or revenue model to weather the dot-com bust. Microsoft Corp. ( MSFT), Cisco, Intel Corp. ( INTC) and Qualcomm ( QCOM) are among the dot-com era companies that continue to be technology sector leaders today, though each company faces slowing growth and transition challenges.

[See: 10 Ways to Invest in Driverless Cars.]

Contrasts between today’s technology sector and the dot-com era are significant, including differences in business models, growth prospects and valuations. Many of today’s top-performing technology companies are “platform” companies with an established ecosystem in which companies plug into the platform to add incremental value or gain access to a network of potential customers.

Apple provides a striking example of how dot-com era business models have evolved. In 1999 Apple was primarily a computer company, selling Apple hardware and software in a highly competitive marketplace. Today, Apple is a ubiquitous platform, providing e-commerce, computing, communication and entertainment to hundreds of millions of customers. The installed base of and extensive library of apps tailored to Apple’s ecosystem provides significant barriers to entry, and disrupts legacy business models in numerous industries.

Apple, Amazon, Google, Facebook, Alibaba Group Holding ( BABA) and Tencent Holdings are among the companies that benefit from scalable network effects in which “users beget more users.” Successful platforms have a very different economic model than was the case for the dot-com era winners, in that a limited number of winners gather the majority of revenues and benefit from the barriers to entry created by network effects.

“Winner take all” or “winner take most” markets often feature higher profit margins, cash flows and pricing power than markets with more competitive structures. Technology stocks represented about one-third of the Standard & Poor’s 500 index in 2000, before falling dramatically after the dot-com bust.

Technology stocks represent about 22 percent of the index today, rising meaningfully in important from recent levels. The concentration of the S&P 500 in technology concerns some, but it is important to recognize that the technology sector today is far more diverse than in the dot-com era.

Apple could be classified as a consumer discretionary company, joining Amazon among companies that capture a meaningful share of consumer spending. Google and Facebook are advertising powerhouses, benefiting as digital advertising increasingly replaces traditional television outlets in corporate ad spending. MasterCard ( MA) and Visa ( V) are payment processors, providing critical infrastructure to the financial services industry.

Apple’s slowing growth is well documented, given the challenge in finding a next act with the kind of impact as the iPhone, iPod, iPad, iMac and the App Store. However, there is still rapid growth in many segments of the technology universe. Thanks to Amazon, many people no longer run errands at night or on Saturdays. However, global e-commerce is still less than 10 percent of total worldwide retail sales.

Potential growth for e-commerce is high, as is the threat to traditional brick-and-mortar retailers.

[See: ETFs That Allow You to Invest in Space.]

Amazon’s acquisition of Whole Foods Market ( WFM) may create additional growth opportunities, while threatening grocery industry incumbents. Amazon is also a leader in cloud computing, competing with Microsoft in a rapidly growing industry. Amazon isn’t alone in capturing high-growth opportunities, and growth isn’t confined to the U.S.

China represents a high-growth opportunity for social media, advertising, and e-commerce. Alibaba, Tencent, Baidu ( BIDU), JD.com ( JD) and Ctrip.com International ( CTRP) are among the companies taking aim at the rapidly growing Chinese market.

Valuations during the dot-com era reached dizzying levels, with the price-earnings ratio for the technology sector exceeding 50 percent in 2000. Amazon and Netflix draw the most attention for their lofty valuations today, with both trading above 100 times estimated earnings for next year. The valuation of Amazon has been controversial for years, but the company’s staggering growth and expansion into new markets has converted many naysayers.

Although Amazon and Netflix are valued at controversial levels, the technology sector as a whole is trading far below the heights of the dot-com era. At an upper-teens forward price-earnings multiple, technology sector valuations are comparable to the slow-growth, high-dividend utility sector and are below that of the consumer staples sector.

Valuations of some popular consumer staples stocks don’t seem cheap, with McDonald’s Corp. ( MCD) and Coca-Cola Co. ( KO) trading at forward P/E of about 22, while PepsiCo ( PEP) and Procter & Gamble Co. ( PG) trade at a forward P/E of about 21. Alphabet, parent of search-engine Google, trades at a forward P/E of 24, while Facebook trades at a multiple of nearly 26. At a slightly higher earnings multiple, Alphabet and Google offer considerably higher (though more volatile) growth prospects than the consumer staples stocks that have been favorites for dividend-oriented investors.

Disruption from technology-oriented competitors isn’t going away, threatening legacy business models in most economic sectors. Investors may disagree about whether a company such as Netflix has a sustainable competitive edge against incumbents such as Comcast Corp. ( CMCSA) or Walt Disney Co. ( DIS), but investing in an incumbent without considering the threat or opportunity from Netflix is short-sighted.

Similarly, Amazon may never “grow” into its valuation, but investors should consider the Amazon effect before investing in a retailer that seems to be cheap on the surface.

The contrast between today’s technology universe and the dot-com era is dramatic, and investors who have been avoiding technology should revisit their thinking. Technology stocks, and the market as a whole, may be vulnerable to a correction, but the long-term prospects for technology are favorable as economies previously dominated by manufacturing increasingly become technology-centric.

[See: 10 Great Tech ETFs That Stay Under the Radar.]

Disclosures: Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as believe, estimate, anticipate, may, will, should and expect). Although TFC Financial Management believes that the beliefs and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such beliefs and expectations will prove to be correct. Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational and illustrative purposes.

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Are Tech Stocks Partying Like It’s 1999? originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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