If you are looking for technology stocks to buy, look at the money the companies spend on research and development to stay at the leading edge of tech trends

The success or failure of any tech stock depends on a variety of factors. The company may start out with a promising business plan. But it needs all sorts of things to prosper in the long run. They include the right employees, a favourable economic and regulatory climate, a favourable competitive environment, favourable research outcomes, adequate financing, perhaps the right merger partner or acquisition—the list is long.

The best technology stocks to buy for a Successful Investor portfolio are those with strong growth and the potential to continue growing. These companies become so successful that they start paying dividends. Investors should also examine a technology stock’s balance sheet to glean any hints of hidden value like research and development (see below) and so on.

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Top technology stocks to buy have hidden value in research and development

Technology stocks have always represented a more aggressive segment of the stock market, but the technology stocks with the greatest long-term potential are those that continue to make significant investments in research and development.

The investment odds are against you in a “hot” market — one whose investment appeal is widely, if not universally, recognized. And many tech stocks, especially in a market like the one we’re in now, are overpriced. This is because many investors have inflated ideas of their value.

You can turn the odds in your favour by investing in tech stocks that have hidden assets. These are assets that other investors very often overlook and are a key part of our Successful Investor approach.

Hidden assets are items that don’t necessarily show up on a company’s balance sheet, but can offer dramatic rewards for investors who do their research.

Among technology stocks, research-and-development spending is today’s best-hidden asset. High research-and-development budgets let tech stocks keep adding profitable new products and improving existing ones.

Technology stocks have to treat this spending as a day-to-day expense, much like maintenance or taxes. So research spending comes out of the current year’s sales, and it lowers the current year’s earnings. As a result, earnings per share for tech stocks may appear lower than for stocks in other industries. But, when done right, research and development spending pays off in dramatic long-term returns, both for high-tech companies and for those who invest in technology stocks.

Some of the best technology stocks to develop are also cyclical growth stocks

It seems to us that the term “tech stocks” also misses the point with companies like Microsoft, Intel, Cisco, Texas Instruments and others. These companies have qualified as growth stocks over the last decade, with earnings and stock prices that expand along with the economy. Rather than tech stocks, it would be more appropriate to think of them as cyclical growth stocks that have dominating competitive positions in specific advanced technological fields.

These companies are leaders in their fields and entrenched in their key markets, despite minor inroads by start-ups and small companies. They still have a big future.

The best technology stocks to buy have become more diversified over time

One of today’s most dated investment terms is “tech stocks.” You’ll hear the term flung about as if it referred to well-defined groups of stocks such as oil stocks, mining stocks or banks. The difference is that changes in the price of oil have a direct impact on oil company profits and oil stock prices. Changes in mineral prices have a direct impact on mining company profits and stock prices. Changes in interest rates and in bank legislation have a direct impact on bank profits and bank stock prices. But there is no overriding factor that influences the so-called tech stocks as a group.

The term made more sense in the 1990s and before, when technology companies were in a much earlier stage of their corporate development. Back then, shares of these companies did tend to move as something of a loosely connected group. That was mainly because investors had limited information on which to base their views of many of these stocks, and decide how much to pay for them.

Now, however, you might say the group has matured. The stocks it covers have differentiated. Stocks that qualify as “techs” still include a lot of companies that are little past the start-up phase and are highly speculative. But it also includes stock issues that qualify as traditional growth stocks.

When you’re expanding your portfolio, the technology stocks to buy for a Successful Investor portfolio are the ones that continue to grow, have hidden assets, and have these characteristics:

• High research and development budgets let tech stocks keep adding profitable new products to their lines and improving existing ones
• High cash and low debt aids new product development
• A strong reputation helps win new contracts
• A history of staying on the leading edge of new tech trends

Many tech stocks start as growth stocks and then go sideways or downwards for a period of time. Has this stopped you from investing in tech stocks?

Technology stocks aren’t for everyone, as they can come with a higher amount of risk than some other stocks. What do you look for as a sign of stability in the tech stocks you’re interested in adding to your portfolio?