All eyes are on Apple (AAPL) after the tech giant’s stellar earnings report last week, and deservedly so.
Sporting a market cap of $675 billion, Apple is the most valuable company in the world.
The stock represents 3% of the S&P 500 and 14% of XLK — the exchange-traded fund that tracks S&P 500 tech stocks.
In other words, much of the stock market lives and dies by what happens to Apple.
A return to positive growth in iPhone sales was a huge relief to investors and helped drive the tech-heavy Nasdaq index to a fresh all-time high.
But the biggest story in tech isn’t about Apple or any of its large-cap peers.
Over the next few years, the real profits in tech stocks are going to come from small-cap firms.
As senior analyst Jonathan points out below, now could be best time to load up on shares…
Don’t Be Fooled — The Greenback Won’t Stay Down for Long
The dollar has been a thorn in side of stock investors for several years now.
As you may know, a rising dollar pinches the profits of U.S. companies that do business in foreign countries.
So while the greenback has gained more than 20% over the last three years, U.S. multinationals have felt the pain.
Economists with the Federal Reserve estimate that the dollar’s steep rise may have reduced U.S. corporate net incomes by as much as 5.6% between September 2014 and March 2015 (the steepest period of the dollar’s three-year run so far).
President Trump asserted that the dollar is “too strong.” But his proposed pro-growth policies will likely only drive the buck higher.
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No surprise here; investment capital will flow into the countries offering the highest return on their cash.
On these hopes, the buck has risen as much as 5% since Election Day.
However, in the last few weeks, President Trump has rattled the markets by signing a flurry of executive orders, including a temporary travel ban on visitors from several Muslim nations.
This will only put a temporary drag on the market, though.
The effect of Trump’s tax cuts and pro-business legislative reform will be far more impactful when they get rolling.
And while the ensuing rally on the dollar might be bad news for tech giants, its great news for the tiny firms.
Here’s how you can trade the action…
Leave Your Passport at Home to Bag These Profits
Tech companies are particularly sensitive to the dollar’s movements because they do a lot of international business.
For instance, Apple Inc. (AAPL), Alphabet Inc. (GOOGL) and Microsoft (MSFT) generate more than half of their sales overseas.
On the other hand, Bank of America Merrill Lynch data show that 81% of sales by companies in the small-cap Russell 2000 index come from the United States.
Investors have already begun rotating their portfolios to shed large-cap tech holdings and load up on domestically focused names.
In the last three months, the Powershares S&P SmallCap Information Technology ETF (PSCT) has gained 17%, nearly double the gain of the large-cap tech fund, XLK, over the same period.
And if the dollar keeps climbing, small-cap names have a lot more room to run.
Bottom line: Tech investors would do well to load up on small caps while the dollar takes a breather. Individual stocks will yield the purest plays, but a focused fund like PSCT gives investors a broad, less volatile way to play the action.
On the Hunt,
Senior Analyst, Wall Street Daily