Hedge funds and so-called “alpha funds” are heavily dependent on the tech sector. Because these funds aggressively seek high returns, they are dependent on industries that have high rates of growth. Tech stocks are prone to very large swings, so for an investor who believes she can time the market, they are a great option.
While retail investors debate amongst themselves if they, or anyone, can time the market, institutional investors know they can. So they look for stocks like Pandora ( P), Red Hat (RHT), Facebook (FB), and Google (GOOG) as investments that can significantly raise their overall fund’s performance. So it’s no surprise that these stocks have tremendous levels of institutional ownership. 96% of P and 97% of RHT are owned by an institution. That’s tremendous when compared to the 20% that own Kinder Morgan Partners (KMP) or the 48% that own Reynolds American (RAI)–both relatively low risk stocks that retail investors depend on for passive income.
The returns these stocks can offer are staggering. The relatively mature GOOG has already returned over 25% for 2013, while FB has returned over 77%. Pandora has offered investors a mind-numbing 164% return for 2013. Or how about Tesla Motors (TSLA), which is up a staggering 434% for the year–although, noticably, its institutional ownership is a mere 59%. There is tremendous money to be made in investing in tech.
And money to be lost. While RHT is flat for 2013, it fell over 7% after hours Mondayafter reporting lower-than-expected billings that overshadowed EPS and revenue beats. Pandora fell by over 10% during the day’s trading as investors fret over the launch and possible success of iTunes Radio. FB was largely flat with some analysts saying that the company is stalling.
The risks in these names is clear–tremendous value can be made by investors who understand the volatility of these stocks, as well as their growth potential, and can invest accordingly. The counterparty will not fare so well, however. Those who jump into tech stocks blind or with imperfect knowledge and understanding will not only underperform the S&P 500–they will lose their shirts. Don’t believe me? Look at Velti (VELT), once a darling of the budding mobile revolution. It now trades for 38 cents a share and is down year-to-date over 91%.