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.

Teltronics swung to a third-quarter profit of $2.6 million, or 23 cents a share, from a loss of $80,000, or 2 cents, a year earlier. Revenue soared 75% to $14 million. The operating margin widened from 4.7% to 21%. The cash balance rose 66% to $1.3 million and debt grew 12% to $7.7 million. Teltronics is still running a shareholders' deficit, but three straight quarterly profits have lessened it by a third to $4.6 million.

Teltronics trades over-the-counter. The shares topped $1 in November, following third-quarter results. The turnaround appears sustainable after severe cost cuts. Management slashed 30% of the payroll in 2008 to restore profitability. Its stock trades at a price-to-earnings ratio of 7, an 80% discount to communications equipment peers.

-- Reported by Jake Lynch in Boston.

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