Small-Cap Tech Stocks With Big Potential

BOSTON (TheStreet) -- The tech industry is rife with innovative companies and lucrative investments. Here are three small-cap stocks that have trounced indices during the past year.

3. Transcend Services(TRCR) sells medical transcription software. Its product records voice data and then edits and formats it into electronic medical records. Transcription is a critical efficiency booster for health care providers. Transcend controls 3% of the market, putting it second to MedQuist(MEDQ), which holds an 11% slice.

The company boasts a 95% customer retention rate and a record of growth, regardless of economic conditions. During the past three years, Transcend has increased revenue 30% annually, on average, and boosted net income 67%.

Fourth-quarter profit climbed 6.8% to $1.6 million, but earnings per share were unchanged at 17 cents. Revenue increased 67% to $21 million as Transcend added customers. Its operating margin narrowed from 19% to 16%. Transcend's stock commands a premium, trading at a price-to-projected-earnings ratio of 18. Nevertheless, it remains an attractive investment, ranking among our top 300 stocks. Its shares have gained 92% during the past year.

2. Veeco Instruments(VECO) designs machines that make data storage equipment, semiconductors and solar panels. Despite a market value of $1.3 billion, the company has a diversified customer base that includes nanoscience researchers.

Veeco swung to a fourth-quarter profit of $19 million, or 50 cents a share, from a loss of $74 million, or $2.35, a year earlier. Revenue increased 33% to $146 million. Veeco's operating margin widened from less than 1% to 13% as volume improved. Its balance sheet has $284 million of cash and $101 million of debt. A quick ratio of 2.6 demonstrates outstanding liquidity.

Its stock has climbed almost sevenfold during the past year. Despite the heady run, Veeco shares are cheap at a price-to-projected-earnings ratio of 13, a 19% discount to the industry average. Among 12 analysts surveyed by Bloomberg, 10 recommend buying shares and the remainder advise holding them. JPMorgan(JPM) offers the most bullish price target, predicting a 49% increase to $50.

1. Teltronics(TELT), which makes hardware and software for telcom companies, has returned 5,344% during the past year. This micro-cap has a market value of $13 million and a beta of 4.1, which means it magnifies market swings. Investors seeking a speculative investment should consider the stock.