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 aren't. This year, as the Nasdaq Composite 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 their starring roles at two much-hyped trade shows. If you didn't know any better, you'd think that the only technology stocks worth owning were Google ( GOOG) and Apple Computer ( AAPL). Yet there's 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.
Hardware's RestorationOne 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) put the exclamation point on this idea in late December by buying industry rival Maxtor at a big premium.
Breaking Out Corporate CheckbooksA lot more of the top prospects this year are focused on the broadband communication build-out from different angles. Some, such as newcomer Ikanos Communications ( IKAN), are probably overcooked and have limited potential. But others, such as high-end network operator Broadwing ( BWNG), optical-laser components maker JDSU ( JDSU) and the jack-of-all-digital chipmaker Broadcom ( BRCM), 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 ( CRAY), the nation's 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% because of 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 that's straining just to turn on the lights. If you buy now, you might have to wait a while for action, but there's $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). 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 midsummer, 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.
Getting Cheaper, Growing FasterSo 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 don't 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) and ValueClick ( VCLK). 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 email marketing. It's 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, there's nothing wrong with Apple and Google -- but there might be a lot more to tech this year than white boxes and the search cult. Google was the last war. Here's 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|
|ValueClick (VCLK)||Ad Agencies||2 B||$20.64||19.5|
|Broadcom (BRCM)||Semiconductors||19.7 B||57.25||74.4|
|Akamai Technologies (AKAM)||Internet Software||3.4 B||22.80||11.3|
|PMC-Sierra (PMCS)||Semiconductors||1.7 B||9.55||79.6|
|ON Semiconductor (ONNN)||Semiconductors||1.7 B||6.94||-|
|JDS Uniphase (JDSU)||Comm. Equipment||4.9 B||2.96||-|
|Broadwing (BWNG)||Comm. Equipment||559 M||7.59||-|
|Seagate Technology (STX)||Data Storage Devices||11.6 B||24.23||13.2|
|Cray Inc. (CRAY)||Computers||158 M||1.79|
|RELM Wireless (RWC)||Wireless Equipment||122 M||9.33||13.5|
|Google (GOOG)||Internet Services||137 B||466.25||103|
|Apple Computer (AAPL)||Computers||72 B||85.59||55|
|Morgan Stanley High-Tech Index (MSH.X)||N/A||N/A||552.73||N/A|
|Source: MSN Money|