Featured Stocks Jun 6 2001 5:15PM CST
In Search of the Next Great Tech Stock- Part One
by Chris Connor
Senior Technology Analyst, WallStreetCity.com
Time for a New Sheriff in Town
For years, investors could buy superior technology stocks like Microsoft {MSFT}, Intel {INTC}, EMC {EMC}, Sun Microsystems {SUNW}, and Cisco Systems {CSCO} and reap massive returns on their money. However, those stellar companies appear to be headed for their twilight years because of their incredible sizes and rapidly-changing technology. Rapidly changing technology has altered the futures of MSFT and INTC because the PC is slowly-but-surely being replaced by network and information appliances such as PDAs and cell phones. Although it is not dependent on PCs, rapidly changing technology is also hurting CSCO as young Juniper Networks {JNPR} continues to breathe down its neck with more innovative technology. SUNW and EMC sent waves through the stock market recently when Sun pre-warned of weakness in its fourth fiscal quarter and EMC announced its largest number of job cuts in over five years. Don't misunderstand, these companies will not go away (far from it actually), but their stocks will not rise at anywhere near the pace that they have in the past. With that in mind, it is time to look for the next tech stock that has the best potential to achieve the same caliber of massive returns as those former Wall Street juggernauts.
The Search
With the help of ProSearch, let's now get down to business! First and foremost, the next great tech stock has to be expected to grow rapidly over the long-term. Some stocks may be able to soar into outer space in the short-term, but it is success over the long-term (five years or more) that has allowed the major tech stocks like Cisco, Sun, and EMC to achieve elite status. Secondly, the company must have projected earnings growth in excess of 20 percent for its next fiscal year. Frankly, this is the criterion that tripped up most of the prospects because of the current economic slowdown. To make sure that companies do not slip through the filtering out process just because of high projections, criteria such as the number of positive earnings surprises over the last four quarters, the number of negative earnings surprises (set at 0), and the number of revenue increases over the last four quarters (had to be 4) were used to see what each company's business has already accomplished. One-year cash flow growth was also used to make sure that companies were not burning through cash.
The Top 20 Prospects
These are the 20 stocks out of over 107 initially that make the grade.
Company Ticker LT Growth ST Growth Positive Surprises 1-Yr CF Growth
Juniper Networks JNPR 50.2% 22.8% 4 52.8%
Mercury Interactive MERQ 38.9% 29.4% 4 11.3%
BEA Systems BEAS 42.2% 47.1% 4 21.1%
Ciena CIEN 37.9% 54.8% 3 12.5%
Brocade BRCD 43.0% 53.2% 4 30.0%
Nvidia NVDA 36.3% 31.5% 4 19.4%
Check Point Software CHKP 40.0% 31.6% 4 22.9%
Oni Systems ONIS 44.3% 253.8% 4 NA
Matrixone MONE 49.5% 31.5% 4 400.0%
Intranet Solutions INRS 42.5% 43.6% 4 71.4%
AXT AXTI 41.0% 31.1% 3 6.7%
AremisSoft AREM 40.0% 42.4% 4 7.1%
EXFO Electro-Optical EXFO 41.7% 20.0% 3 17.1%
Actuate ACTU 42.7% 60.7% 4 17.4%
BSQUARE BSQR 38.3% 42.9% 4 15.8%
Ectel ECTX 40.0% 25.7% 4 20.4%
Digital Lightwave DIGL 38.8% 20.5% 3 25.2%
Aware AWRE 43.1% 133.9% 4 0.0%
Tekelec TKLC 35.0% 31.7% 3 4.3%
Metalink MTLK 46.0% 294.1% 4 54.5%
Close But No Cigar
Notable stocks that did not make the cut to 20 include:
Company Ticker
Veritas Software VRTS
McData MCDT
Wind River Systems WIND
Avanex AVNX
I2 Technologies ITWO
Network Appliance NTAP
PMC Sierra PMCS
Finisar FNSR
Rambus RMBS
Globespan GSPN
Industry and Leadership Filters
The next great tech stock will have to dominate an industry that offers nearly limitless potential going forward (e.g. fiber optics, e-business software, and storage). Simply put, any company that is not a leader or on the way to becoming a leader of an ascendant niche or industry will not make the all-important cut to eight stocks. As far as industries are concerned, companies like BSQUARE, Metalink, Aware {AWRE}, and Nvidia {NVDA} were eliminated because the PC and DSL (copper is grossly inferior to fiber optics as a broadband medium) industries do not qualify as being ascendant. Nvidia was especially tough to eliminate because it dominates 3D graphics and has been one of best performing tech stocks over the past six months with a return of about 128 percent; however the company remains highly dependent on the PC industry, even though it is branching out with the upcoming Xbox from Microsoft. Although most of the remaining top prospects reside in industries with substantial future potential, a large number of them such as MatrixOne, IntraNet Solutions, Aremissoft, and Tekelec, are not dominant companies that tower over their competitors in their respective industries.
The Elite Eight
Drum roll please! The eight stocks that make it to the finals are:
Juniper Networks - JNPR may be playing second fiddle to Cisco in the IP router market, but the upstart continues to steal market share away from the technology giant with its innovative technology.
Mercury Interactive - MERQ has carved out quite an impressive position for itself on the information superhighway by dominating the industry for web site testing, with a particular focus on e-business. Mercury's software and services identify problems by emulating real world conditions (the behavior of thousands of users) so companies can constantly improve the performance, reliability, and scalability of their Web sites to better satisfy end-users.
Brocade - Brocade ranks among the leaders of the storage industry - along with EMC {EMC}, Network Appliance, and Veritas - because it owns a substantial lead in the storage area network (SAN) fabric switch industry. Brocade's dominance is evident by its nearly 93 percent of this explosive market.
Digital Lightwave - DIGL is the most attractive (highest growth, highest margin) leader in the market for managing and monitoring fiber optic networks. DIGL continues to exhibit strong results in spite of the economic slowdown that has severely punished other areas of the fiber optics industry.
Ciena - Without a doubt, CIEN has marked its territory in the fiber optics industry as the 800 pound gorilla of dense wavelength division multiplexing (DWDM). DWDM vastly expands the capacity of fiber optic networks by placing a plethora of colors on a single fiber optic strand.
BEA Systems - BEAS is one of the big boys in the e-commerce infrastructure software arena. The company's 4,000-plus customers use its software as the transaction platform for Internet sales, credit card billing, stock trading, supply chain management, and electronics fund transfers.
Oni Systems- ONIS is an extremely young fiber optics company that is a major player in improving the bandwidth capabilities of Metro Area Networks (MANs). The company has only been public since the summer of 2000, but it has already shown the ability to cut down on its losses and generate sequential revenue growth at an average of 69 percent per quarter for the last three quarters.
Check Point Software - CHKP dominates the lucrative Internet security industry and is the most valuable company in that industry (in terms of market value). The company's products are designed to keep corporate networks safe and sound from harm. |
