Newsletter guru and money manager Jim Oberweis says the strong performance of technology stocks this year isn’t a flash in the pan, but instead the start of a longer-term trend.
“Part of the reason for the downfall of the tech sector was that from 1999 to 2000, stocks were valued so high that investors had priced in perfection, which is something that rarely occurs,” Oberweis tells AOL’s Daily Finance. “Over that period, we saw tech stocks lag even though company sales were growing just fine. [Then] over the last two years, corporate investment has been curtailed and after the financial crisis hit, consumers also cut spending. But some of those clouds now appear to be passing.”
Oberweis says he doesn’t expect “robust” spending in a recovery. “But I do think it will be easier for companies to grow off a much lower base — which is where we are now,” he says. “Many tech companies are not reflecting this, so I believe that they will surprise on the upside, especially in areas such as network security, routing traffic, and meeting rising bandwidth demands of voice-over-IP and with apps like smart phones.”
In particular, Oberweis thinks smart phones and smart-phone-related technologies are poised for huge growth as companies develop the next “killer apps” in coming years. “During the 1980’s and early 1990’s, the personal computer was the killer app,” he says. “During the late 1990’s, it was the Internet. During this decade – zilch. But it’s coming. I think the next killer apps will be technologies that utilize bandwidth and the Internet ubiquitously via small intelligent devices like the smart phone. This means that video-on-demand is likely to have explosive growth. … Besides content providers, companies that route traffic across networks are well-positioned because of the exponential increase in Internet traffic. You will soon be able to watch TV just about anywhere. … Smart phones and cruising high-speed wireless networks will morph from boring cell phones into robust, multi-functional devices.”
Identifying technology stocks levered to “Killer Apps”, like firms tied to smart phones and video-on-demand services — and avoiding slow-growth parts of the tech industry, like stocks that depend on the PC market — are ways to approach tech sector investments, Oberweis says. In addition, he says to look at revenue growth rates to see if consumers have a thirst for what the company is making. And he says to “target proprietary products and avoid companies that make commodity-type products by looking at gross profit margin. “High gross margins north of 40 percent signal that a company makes something relatively unique — at least for now,” he says. “Low gross margins imply that products are ‘me-too’ and that the primary method of competition is based on price. Even better, look at gross margins over the past few years to see if they are expanding. Contracting gross margins are a red flag that competition is heating up.”
Oberweis mentions three tech stocks now worth a look: Synaptics (SYNA), Starent Networks (STAR), and Netlogic Microsystems (NETL).