How to Build a Portfolio of Tech Stocks

By Markets Fool.com

The tech sector can be a tough one for new investors to understand. The wide selection of software, hardware, and ecosystem plays can be mind-boggling, while industry jargon can be confusing.

Continue Reading Below

In this article, I'll cover the basics of assembling a diversified portfolio of tech stocks. Every investor's definition of "diversified" is different, but I'll discuss 10 tech stocks that can be split into three categories: core, speculative, and ecosystem investments.

Source: Pixabay.

Core stocks
Core stocks are stable, blue-chip companies that have posted steady growth in the past. In my opinion, four companies -- Intel , Microsoft , Apple , and Cisco -- are solid core holdings.

Intel is the largest chipmaker on the planet and consistently designs the world's smallest and most powerful chips. Microsoft is on the verge of uniting the phone, tablet, PC, and Internet of Things (IoT) markets with Windows 10. Apple sells the iPhone, the top-selling smartphone in the world, and its Mac line is the fastest-growing brand of PCs worldwide. Cisco, one of the largest networking companies in the world, leverages its dominant position in switches and routers to expand its higher-margin software and security businesses.

Continue Reading Below

These stocks won't always outperform the market, but they all trade at reasonable P/E multiples and offer healthy dividend yields compared to S&P 500 averages.

Intel

Microsoft

Apple

Cisco

S&P 500

P/E

13.6

16.8

17.1

16.6

20.5

Dividend Yield

3.1%

3%

1.5%

3%

2%

Source: Yahoo! Finance, April 15.

Speculative stocks
Investors looking for more growth potential will turn their attention to tech stocks with higher valuations, which tend to lack the safety of blue-chip stocks.

Let's take a closer look at three stocks that fit that profile: Sierra Wireless , Palo Alto Networks , and Splunk . All three companies have posted robust revenue growth over the past two years.

SWIR Revenue (TTM) Chart

Source:YCharts

Sierra Wireless owns the world's largest portfolio of 2G, 3G, and 4G LTE embedded modules and gateways, which form the foundations of the Internet of Things market. Palo Alto Networks' main product is a firewall that shields businesses from data breaches. Splunk is a data analytics company. Its software helps businesses improve operational efficiency, better understand customer habits, and identify security threats.

All three companies are "pure plays" on businesses traditionally covered by larger and more diversified companies. By investing purely in high-growth sectors like IoT, network security, and analytics, Sierra, Palo Alto, and Splunk aren't weighed down by slower growth businesses. However, all three companies' bottom lines are in the red (on a GAAP-adjusted basis), and two of them are very pricey in terms of forward valuations:

Sierra Wireless

Palo Alto Networks

Splunk

Forward P/E

23.7

93.3

214

Net loss* (most recent quarter)

($1.7 million)

($43million)

($57million)

Source: Quarterly reports, Yahoo Finance, April 15. *GAAP-adjusted.

Therefore, investors should do their due diligence and approach these stocks with caution. Moreover, these stocks should never outweigh core blue-chip positions in your portfolio.

Ecosystem stocks
Long-term Investing in the tech sector requires the ability to see how the world will look in 10, 20, or 30 years. Therefore, investors should keep an eye out for the growth of disruptive ecosystems, like the ones Google , Amazon , and Facebook are developing.

Google is most widely known for its search engine and mobile OS, but it has also invested in driverless cars, robots, artificial intelligence, genetic testing, and biotechnology. While those efforts seem like "moon shots" today, they might evolve into viable sources of revenue in the future. Meanwhile, Amazon is known as an e-commerce giant today, but its growth into the cloud, IoT, and smart home industries shouldn't be overlooked. Facebook is expanding into IoT tech, virtual reality, mobile payments, and video hosting.

Google's driverless car. Source: Google.

All three companies are building massive ecosystems that could have an enormous impact on habits and lifestyles over the next few decades. Driverless cars could take us to work, Amazon drones could send groceries to our doorstep, and Facebook could let us virtually visit friends through VR headsets. Simply put, these companies are turning sci-fi into reality.

The key takeaways
We've only scratched the surface of building a successful tech portfolio, but here are three key tips to help you get started.

First, portfolios should be grounded by reliable core stocks. These stocks probably won't double or triple, but they might bounce back faster from market crashes. Second, growth-oriented investors can buy some speculative stocks, but they should know that these stocks can be highly volatile. Lastly, investors with lots of investing years ahead of them should consider buying long-term ecosystem plays that could dominate our lifestyles in the future.

The article How to Build a Portfolio of Tech Stocks originally appeared on Fool.com.

Leo Sun owns shares of Apple and Facebook. The Motley Fool recommends Amazon.com, Apple, Cisco Systems, Facebook, Google (A shares), Google (C shares), Intel, Palo Alto Networks, Sierra Wireless, and Splunk. The Motley Fool owns shares of Amazon.com, Apple, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.