The volatility of the tech market is enough to scare many investors away. However, SQN Investor’s Amish Mehta believes that there’s money to be made from this instability.
For awhile, it seemed like investors couldn’t lose in the tech market. Tech stocks were inching higher and higher, and investors were profiting enormously. However, 2016 is proving that the tech market can sometimes be fickle.
For example, the FANG stocks have made headlines for declining in value since the start of the year. Meanwhile, LinkedIn (NASDAQ:LNKD) was in the news last month for dropping 42 percent in one fell swoop when its revenue forecast fell short of analyst expectations. And it’s not just major tech companies that are feeling the pinch. Small- to mid-cap companies are also facing headwinds, and often feel them more acutely than their major multinational counterparts.
However, those aren’t necessarily reasons for investors to despair. Indeed, quite the opposite is true if Amish Mehta of SQN Investor is to believed. In this video interview with Bloomberg, he gives his unique outlook on tech stocks, and explains how there is opportunity in the market’s volatility.
Mehta’s view on market volatility
According to Mehta, there is “volatility in tech across all investments.” And while a small handful of companies are trading “at astronomical valuations,” the vast majority of stocks on the market aren’t overvalued.
However, just because they are not overvalued doesn’t mean they aren’t impacted by the market’s volatility. Mehta believes that what’s key is investing in tech stocks by betting that they will be somewhat unstable. He said, “it is impossible to time volatility over a short-term horizon,” particularly in the case of small- and mid-cap stocks. Therefore, he looks to a timeframe of two to three years. With in-depth research, he then makes bets on which companies will see some upside.
Ultimately, volatility is incorporated into the picture as a buying option. “That’s how we think you make money in small-cap tech,” he states in the video.
The most challenging part of this strategy is raising capital, he explains, adding, “it’s key to have investors that are aligned with the strategy.” In his line of work, he looks for longer-term investors (like university endowment funds) “that understand that these are the dynamics of tech stocks.” In the case of personal investing, investors get to decide what timeline they’re looking for, which removes this obstacle.
Another obstacle in the long-term small-cap investing game is the sheer randomness of market volatility. Mehta notes that “random factors really take over, as opposed to anything actually to do with the company.” Therefore, investors need to have a keen eye for growth over valuation. How do you identify these companies? Mehta’s final advice is to look for companies that have a high free cash flow yield and 20-percent sustained growth.
Obviously, there are no guarantees in the high-stakes game of small-cap tech investing. However, as Mehta demonstrates, the market’s volatility can be viewed as an opportunity and asset, allowing investors to get ahead of their peers by making long-term bets.
Securities Disclosure: I, Morag McGreevey, hold no direct investment interest in any company mentioned in this article.