Strong Dollar Nothing to Fear for Tech Stocks

On this day in March of 2000 the NASDAQ Composite Index closed at 4,940.61 after peaking a little above 5,000 just two weeks earlier. Today, the index opened at 5,020.60, a scant 1.6% higher over the course of fifteen years. I’m tempted to take a jab at index funds by pointing out how much worse an investor would have fared by simply buying and holding an index fund for the NASDAQ during that period than by owning just about anything else, but the real lesson to be learned here is in understanding the difference between where the tech sector is now as an industry versus where it was then.

The very nature of technology makes it different from everything else; not only is it used to improve its own ecosystem of products and services, but it can also be used to improve everything else. You can’t say that about energy, agriculture, materials or any other sector. While they may impact adjacent industries that consume their products or leverage off of their cost efficiencies, only technology can be used by every single business in the world to become more competitive. That’s not to say that all of them do it, but the ones that don’t eventually pay the price for allowing their competitors to become more productive, less inefficient, and better able to adapt to changing conditions.

That’s why the strength of the U.S. dollar will not impact tech stocks as much as it will other sectors. Even when the cost of technology goes up (which it will for overseas consumers paying for American tech with something other than dollars), they can’t afford to give it up. Although their profit margins may shrink until the dollar weakens, the cost of allowing their competitors to get ahead of them is prohibitively expensive. So it is no surprise that the NASDAQ gained 3.2% last week while the S&P 500 was up 2.7%. Good news for business in general is even better news for technology in particular.

To be sure, there are some foreign companies already so financially weak that the added burden of paying for anything in increasingly expensive dollars may be too much to bear, and many of them will have no choice but cut back on spending. Much like the medieval practice of bloodletting to the rid the body of disease, the result of this course of action is almost always to hasten the precise outcome the action is intended to avoid in the first place. So don’t sweat the strong dollar when you evaluate tech stocks; it may have a slightly negative impact in the short term, but will not alter the long term positive result.

NASDAQ Composite Index:                                                                        

Friday, March 20 = 5,026.42                                                    

Trailing 12 months = + 18.4%                                        

Trailing 7 Days = + 3.2%                                       

Trailing 4 Weeks = + 1.3%

Next Wave Portfolio Update—Closing Out Ebix Position

By Rob DeFrancesco

I am removing Ebix (EBIX) from the Next Wave Portfolio. At a recent price of $30.19, the stock has gained 79% since it was first added to the portfolio in April 2014. Those subscribers who bought the stock at the time of the original recommendation should keep in mind the tax implications of selling before the one-year anniversary of the purchase.

Driven by continued strong fundamentals (fourth quarter revenue rose 19% and easily beat the consensus estimate), Ebix shares have jumped sharply just since the start of December (partly on heavy short covering), this past week hitting a new 52-week high of $31.55.

The stock’s valuation has gotten stretched relative to earnings growth, making the current risk/reward balance less attractive. Ebix’s forward P/E multiple over the past three months has advanced to 16.9 (1.2x recent EPS growth) from 10.6, signaling to me that it’s a good time to lock in the gains on this stock.

Among the other Next Wave Portfolio holdings, there was some good news last week at Gigamon (GIMO): The company received word that its family of solutions has been added to the Department of Defense (DoD) Unified Capabilities Approved Product List (UC APL). This certification shows that Gigamon’s product portfolio passed rigorous DoD evaluations.

While the company already has product installations in certain DoD units, being added to the UC APL permits Gigamon solutions to be deployed on all DoD network infrastructures, expanding the company’s addressable market within the U.S. federal vertical. In the latest quarter, federal bookings represented 13% of total bookings and were up 26% year over year.

At the JMP Securities tech conference earlier this month, Varonis Systems (VRNS) VP of marketing David Gibson talked about how the company’s solutions allow organizations to efficiently control and secure human-generated (unstructured) data. Varonis customers have a clearer view into their entire unstructured data pool, giving them the opportunity to better secure the most valuable data, while at the same time moving unused data to cheaper file storage systems.

Many recent security breaches have involved attacks from an insider or someone who gained access to an insider’s credentials. Most companies these days give employees too much access to various kinds of data, creating multiple security vulnerabilities. Solutions from Varonis help reduce the scope of attacks simply because employees within an organization are only able to retrieve and work with the specific files they need on a regular basis, limiting the number of accounts with so-called privileged access.

In addition, Varonis solutions continuously monitor all file usage within an organization and measure it against predetermined baselines, looking for deviations that may indicate breach-related behavior (often involving multiple modifications to data or a quick surge in data deletions). If anything out of the ordinary arises, the system sends out security alerts.

In the recovery process following a breach, Varonis solutions are helpful because they provide a complete record of all accounts involved in the attack and the associated compromised data.

For the year ahead, Gibson said Varonis is focused on bringing on new customers (the company today has more than 3,300 customers, with 950 added last year) and improving overall sales force productivity. As of the end of 2014, the majority of Varonis’ sales reps had been with the company for less than nine months. It usually takes an average rep about 18 months to reach full productivity, so a good number of Varonis salespeople will be hitting their stride in the back half of 2015, which bodes well for growth going into the end of the year.

STI Portfolios
INVESTMENTS(close px)(close px)
CA TechCA$31.39$32.904.8%
Cisco CSCO$27.94$28.441.8%
Portfolio Average2.9%
NASDAQ CompositeIXIC4871.765026.423.2%
NEXT WAVEcloseclose
Nice SystemsNICE$59.90$59.80-0.2%
Nimble StorageNMBL$24.01$23.57-1.8%
Paycom S’warePAYC$31.40$33.777.5%
Silicon MotionSIMO$26.64$27.714.0%
Varonis SystemsVRNS$29.76$29.920.5%
Portfolio Average1.9%
NASDAQ CompositeIXIC4871.765026.423.2%