Stock Watch


4 Great Tech Stocks
You've Never Heard Of

Jennifer Schonberger

Technology stocks are poised to do well this year, and these small, lesser-known companies offer promising value.



When it comes to big-company-stock indexes, the winner last year was Nasdaq. The index, which is heavily weighted toward large technology companies, rose 20.1%, while the Dow Jones industrial average returned 14.1% and Standard & Poor’s 500-stock index returned 15.1%. And technology stocks look poised to perform well this year, too.

Business and consumer appetite for technology remains healthy. As the economic recovery continues, companies are gearing up to spend more on technology to remain competitive. Fast-growing emerging nations offer technology companies hungry markets as those countries improve their communications networks. And although European nations are expected to cut their budgets this year, the impact on tech spending will be minimal, says Scott Kessler, who heads technology research at Standard & Poor’s.

And technology companies’ balance sheets are strong. That gives the firms the flexibility to buy back stock, boost or institute dividends, expand, or buy other companies. The level of merger activity, which picked up in 2010, is expected to remain strong this year.

Given the run-up in the shares of big tech companies, we thought we’d look for value among some smaller, lesser-known names. We came up with four relatively obscure stocks. We think three of them are buys now; you should be ready to pounce on the fourth if its price dips.

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Bank on IT Security

Nice Systems (symbol NICE) makes software for security, monitoring and archiving. That includes everything from facial capture and recognition to voice archiving and analysis. On the corporate side, the Israeli company offers software to help detect fraud and prevent money laundering at financial institutions. Governments use Nice’s technology for video monitoring and analysis in airports and train stations to help prevent terrorism.

The company’s broad product portfolio and strong global presence give it an edge over its competitors, says S&P’s Scott Kessler. “Plus, its intellectual property will help keep new competitors at bay,” he says.

Revenue rose 21%, to a record high of $176 million, in the third quarter, while earnings rose 18%. Analysts estimate that sales rose 18% in 2010, to $686 million; look for a jump of 10.8% in 2011. They believe the company earned $1.72 per share last year, an increase of 12% from 2009, and they project a 16% improvement this year, to $1.99 per share. The stock, at $34.95, trades at 18 times analysts’ average 2011 earnings estimate (all share prices and related data are through the January 24 close).

Get Smart and Buy the Parts

Instead of investing in the makers of smart phones, consider buying the parts makers to cash in on the industry’s torrid growth. With 50% of the smart-phone market, OmniVision Technologies (OVTI) is the leading manufacturer of imaging chips with high-resolution cameras and video recorders for smart phones. Smart-phone components account for 60% of the company’s sales and are OmniVision’s fastest-growing business.

Although OmniVision operates in a highly competitive industry, the company boasts strong products and has been able to stay ahead of its competitors with cutting-edge technology. A strong balance sheet will enable OmniVision to stay at the forefront.

Aside from smart phones, OmniVision makes image sensors for makers of notebook PCs, auto manufacturers and the security-surveillance market.

The company’s future looks bright. Following a 19% increase in revenue in the fiscal year that ended last April, analysts project that sales will surge 48%, to $892 million, in the year that ends this April. Analysts expect earnings of $2.00 per share in the current fiscal year, up from 59 cents in the year that ended in April 2010, and $2.33 in the year that ends in April 2012. At $26.15, the stock sells at 13 times April 2011 earnings estimates, a price-earnings ratio that appears undeservedly low.

Play Telecom

Telecommunications providers are in a bit of a jam. Their networks have become overloaded as people use more mobile devices and send large files of data containing photos and videos. But 2011 is expected to mark the start of major face-lifts for telecom carriers’ networks.

Enter Finisar (FNSR). The company makes components that telecom-service providers, such as AT&T (T), need to upgrade their networks to transfer growing volumes of data quickly. Finisar’s products connect local-area networks, storage-area networks, metropolitan-area networks and wide-area networks.

Strong growth in Internet traffic and demand for bandwidth for mobile communications is already boosting Finisar’s business. For the quarter that ended October 31 (Finisar’s second fiscal quarter), revenue shot up 65%, to $241 million, from the same period last year, while profits soared 410%, to $38 million. For the current fiscal year, which ends April 30, analysts expect sales to rise 54% and earnings to rocket 200%, to $1.69 per share. They expect sales to rise 17% in fiscal 2012 and earnings to improve by 21%, to $2.05 per share.

At $31.48, Finisar trades at 19 times estimated earnings for fiscal 2011, compared with a price-earnings ratio of 21 for the electronic-device sector. This is a great company that should continue to deliver strong profit growth over the long haul, although, like other small companies, it could occasionally stumble along the way.

Cash in on Wireless

Aruba Networks (ARUN) is an attractive company, but wait for a lower price to buy its shares. Although it had only $267 million in sales last year (the smallest amount of any company on our list), Aruba is giving its gargantuan competitor, Cisco Systems (CSCO) with $42 billion in annual sales, a run for its money. Aruba sells wireless local-area networks, a business in which it has increased its market share from 8% to 12% over the past five years. UBS analyst Jack Monti estimates that the company is gaining one percentage point of the local-area-networking market per year. A one-point gain in market share translates to about 6% to 8% sales growth for Aruba, Monti says.

Although Aruba’s biggest market is universities, it’s experiencing its fastest growth in the corporate marketplace. As businesses upgrade their wireless networks to faster systems with greater bandwidth, Aruba should benefit. For the fiscal year that ends July 31, analysts expect revenues to increase 36%, to $362 million, with earnings projected to soar 90%, to $0.55 per share. Looking further out, Aruba’s market is expected to grow 25% in 2011 and again in 2012.

At $21.28, Aruba trades at 39 times fiscal 2011 earnings, compared with 19 times for the communication-equipment sector and the company’s historical average P/E of 40. Clearly, Aruba shares are not cheap. As such, investors should wait for a pullback and then pounce on this company, which is positioned to continue churning blockbuster profits for the long haul.

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