Markets

How To Size Up Tech Stocks

With the sector leading the market's charge, it's tempting to jump in. These tips may help you pick companies with staying power.

May 2009

By John Moore, Special to CNBC.com

Technology stocks are hot again -- with good reason. These are companies that typically hoard lots of cash and carry little or no debt, two desirable attributes in an unstable economy.

But before you start scooping up tech shares like it's 1999, hoping to power drive your returns after a dreadful year and a half, consider these tips on investing wisely in the sector.

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Smarter evaluations

Investors look to tech stocks to find companies primed for growth, but the technology landscape has been littered with one-hit wonders. To avoid that trap, Rob Cihra, technology analyst at Caris & Company, recommends looking for companies with unique product cycles.

"You want to focus on a company with definable, hopefully unique, product cycles that are going to drive their growth," says Cihra.

Cihra points to the smart phone market as one with strong organic growth, and Apple (symbol AAPL) as a company, whose product cycles can help it weather tough market conditions.

"Apple is showing that while it's certainly not immune to weaker consumer spending, it can still grow within a market that's otherwise shrinking," he says.

Along the same lines, close examination of the competitive nature of a particular sector within technology can help identify stocks with staying power. For John Bright, director of technology research at Avondale Partners, that means looking at sectors with high barriers to entry.

"Competition is very high within technology investing, and if you don't have some core competency that creates a barrier to entry, then you're likely to experience additional competition, which often leads to price competition, which is never a positive thing for equity investors," says Bright.

Enterprise-level software and services typically have high barriers to entry, notes Bright, as is less the case with consumer products.

"Companies that have patents and/or licensing models would have strong barriers to entry," he says, citing Neutral Tandem (TNDM) and Akamai Technologies (AKAM) as good examples.

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