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Posted 1/18/2006
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10 hot techs that aren't Apple or Google
The Nasdaq is surging, but the hype might lead you assume those two giants were all tech has to offer. That's wrong, as these promising names prove.
By Jon D. Markman
Like generals, most investors are always fighting the last war. Failing to really see what is happening right before their eyes, they reach into the past for comparisons and analogies that look just close enough to be true -- but arent.
This year, as the Nasdaq Composite ($COMPX, news, msgs) has jumped 5% in two weeks, much of the talk has been about consumer electronics and Web advertising -- in part because of their success in 2005 and starring roles at two much-hyped trade shows. If you didnt know any better, youd think that the only technology stocks worth owning were Google (GOOG, news, msgs) and Apple Computer (AAPL, news, msgs).
Yet theres a lot more to the strong market this year than the 'Goople' twins. Out of the 200 stocks that have risen the most so far in 2006, Google is not among them and Apple is only the 198th best, albeit with a very nice 19% gain.
So what other tech stocks are banging the top of the charts? And does it make sense to jump in after the unexpected rally?
The answer to the latter is yes, so long as you take those white earbuds off your head, stop searching and begin looking at some neglected names that are starting to find favor again. It seems that investors are warming to the idea that the convergence between consumer and enterprise electronics is finally at hand, spurring a new wave of earnings growth and multiple expansion at companies that persevered through the dead zone of the past five years.
Related news and commentary on MSN Money
Hardware's restoration
One of the red-hot areas this year, just like, well, 1997, is hard-disk storage of all types -- in personal computers and MP3 players, and on networks. Seagate Technology (STX, news, msgs) put the exclamation point on this idea in late December by buying industry rival Maxtor (MXO, news, msgs) at a big premium. Investors usually blast the shares of acquirers, but this time the Street applauded because the erasure of a major disk-drive maker helped remove the threat of price wars and overcapacity, which have tripped up this industry in the past. Seagate is a terrific innovator, and because of its work in the labs, youll start to see much bigger disk drives on computers and personal media players later this year. If the Street comes to think, as I do, that Seagate is on track to earn $2.15 a share in 2007 and deserves a price-earnings multiple of 15, then the stock should trade at $32 by the end of this year, which would be a 32% move.
Another group thats ticking up this year: semiconductors. Chips are the intelligent motors that drive the modern world, powering everything from singing greeting cards to the space shuttle. Among the humbler names that look interesting off the bat this year is ON Semiconductor (ONNN, news, msgs), which makes about 25,000 types of integrated circuits for makers of cars, cell phones, gaming consoles and media players. As inventories thin and end markets perk up, ON could earn 65 cents a share in 2007. Put a 20 P/E on that and youve got the potential for almost a double in the next 12 to 18 months, to $13.50.
A second chip maker with potential to surprise skeptics is PMC-Sierra (PMCS, news, msgs), which traded around $250 in 2000 and now goes for the low, low price of $9.55. PMC was always known as a top-tier communications integrated-circuit maker, but after the purchase of a data-storage business from Agilent Technologies (A, news, msgs), PMC now has a double-barreled approach. In addition to improving the storage unit through cutting costs, it will score wins in the global broadband and wireless data construction boom of 2006. If all goes fairly well, PMC Sierra could be pulling down 51 cents a share in 2007. With a conservative 26 price-earnings multiple, that makes for a $13.25 stock around this time next year, a 40%-plus gain.
Breaking out corporate checkbooks
A lot more of the top prospects this year are focused on the broadband communication buildout from different angles. Some, like newcomer Ikanos Communications (IKAN, news, msgs), are probably overcooked and have limited potential. But others, such as high-end network operator Broadwing (BWNG, news, msgs); optical laser components maker JDS Uniphase (JDSU, news, msgs); and the jack-of-all-digital chip maker, Broadcom (BRCM, news, msgs), could advance 50% or much more as their customers, telecom carriers and equipment makers, break out their checkbooks to upgrade and get more competitive.
If you want to look for some upside in a cheap tech stock on the move, check out Cray Inc. (CRAY, news, msgs), the nations leading supercomputer maker. The company -- which has disappointed optimists repeatedly in the past -- last week lifted its revenue estimates for 2005 and 2006 by as much as 32% due to new commitments by customers on three continents, including the Korea Meteorological Administration, the Swiss National Supercomputing Center and our very own Oak Ridge Labs. Earnings will follow, and the company is likely to emerge from a string of annual losses by 2007.
The problem is that supercomputing is not exactly a growth industry, and at home it is held hostage to a Pentagon budget thats straining just to turn on the lights. If you buy now, you might have to wait awhile for action, but theres $46 million in cash that acts as a safety net and the upside could approach $2.50 to $4 in two years, or as much as a double or better from here. The recent range is wide: It sold for 85 cents a share a few months ago and as much as $14 in 2003.
Everybody loves a long shot, so here is another back-from-the-dead, low-tech tech stock showing promise: microcap RELM Wireless (RWC, news, msgs). It makes two-way wireless radio systems for the homeland security and military market under the Uniden, BK Radio (formerly known as Bendix) and RELM brand names. Between 2003 and mid-summer, shares consolidated at $2 to $3, but a set of big orders from four federal agencies and California foresters got people talking, and shares have tripled to a new all-time high of $9.35. I love new highs. The big change is a new federal standard for digital radios that allowed RELM to compete for more business, and some innovation on the factory floor that allows it to provide better quality and lower prices than rivals. According to Feltl & Co. analyst Richard Ryan, RELM has just 1% share of a domestic market worth $1.9 billion (and the global market is eight times larger), so there is plenty of room for growth. As the coal-mining tragedy in West Virginia showed earlier this month, and the events of Sept. 11, 2001, showed a few years ago, there is a big, big need for interoperable communications for first-responders. The opportunity is out there as long as management is up to the task.
Getting cheaper, growing faster
So how about the larger, better-known stocks? The past two years have been all about compression, with P/E multiples shrinking even as earnings growth has expanded. That happens when investors dont think that growth is sustainable. Therefore, you need to find companies with P/Es that shrank in the recent past despite great growth, yet are on the cusp of expansion now as investors acquire comfort with their potential.
Two that fit this description are Akamai Technologies (AKAM, news, msgs) and ValueClick (VCLK, news, msgs); they are also highly rated in StockScouter, scoring 10 and 9, respectively. Akamai makes equipment that speeds up the Internet and counts companies like Apple and FedEx among its clients. Its shares topped at $340 in 2000 and fell to 56 cents four years ago. At their current perch around $22 -- with a trailing P/E of 11 and P/E on the next 12 months' earnings of 32 -- the shares look pretty compelling. ValueClick offers advertisers a range of services and products to enable Web and e-mail marketing. Its very profitable, sales are accelerating and its P/E multiple, down to 19 from over 75 a couple of years ago, is on the move as well, up to 34 on a forward basis. ValueClick shares are inches away from a new all-time high, so a move higher in anticipation of another solid earnings release on Feb. 20 would be a big confidence booster.
In summary, theres nothing wrong with Apple and Google -- but there might be a lot more to tech this year than white boxes and the search cult. Goople was the last war. Heres a scorecard to help you keep track of my 10 soldiers for the tech battles of 06.
| Tech Stocks: 10 With Potential | | Company Name | Industry Name | Mkt Cap | 1/13/06 Price | P/E* | Stock
Scouter | | ValueClick (VCLK, news, msgs) | Ad Agencies | 2 B | $20.64 | 19.5 | 10 | | Broadcom (BRCM, news, msgs) | Semiconductors | 19.7 B | $57.25 | 74.4 | 10 | | Akamai Technologies (AKAM, news, msgs) | Internet Software | 3.4 B | $22.80 | 11.3 | 9 | | PMC-Sierra (PMCS, news, msgs) | Semiconductors | 1.7 B | $9.55 | 79.6 | 7 | | ON Semiconductor (ONNN, news, msgs) | Semiconductors | 1.7 B | $6.94 | | 7 | | JDS Uniphase (JDSU, news, msgs) | Comm. Equipment | 4.9 B | $2.96 | | 6 | | Broadwing (BWNG, news, msgs) | Comm. Equipment | 559 M | $7.59 | | 5 | | Seagate Technology (STX, news, msgs) | Data Storage Devices | 11.6 B | $24.23 | 13.2 | 5 | | Cray Inc. (CRAY, news, msgs) | Computers | 158 M | $1.79 | | 4 | | RELM Wireless (RWC, news, msgs) | Wireless Equipment | 122 M | $9.33 | 13.5 | Not
rated | | Comparisons | | | | | | | Google (GOOG, news, msgs) | Internet Services | 137 B | $466.25 | 103 | 9 | | Apple Computer (AAPL, news, msgs) | Computers | 72 B | $85.59 | 55 | 10 | | Morgan Stanley High-Tech Index ($MSH.X) | N/A | N/A | 552.73 | N/A | N/A |
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*Stocks of companies operating at a loss do not have a P/E ratio.
Fine Print
To learn more about how ValueClick is connecting advertisers with customers over the Web, read here; to learn more about Cray and its supercomputer products, click here; to learn more about the future of personal data storage, visit this page at the Seagate site. To learn more about the new generation of digital two-way radios, visit this page at the RELM site; to learn more about how Akamai is speeding up the Web, visit this page.
Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Jon Markman was long ON Semiconductor and JDS Uniphase.
Editor's note: Jon Markman will appear at the World Money Show in Orlando, Fla., Feb. 1-4. Admission is FREE for MSN Money users.
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