That pretty much sums up my advice last week regarding how to select technology sector stocks.
You should understand where my cautionary tone comes from, though…
It’s certainly not because I suddenly doubt the tremendous long-term promise for technology stocks. Far from it.
Rather, it’s a short-term response to the tech sector’s less-than-stellar performance during the first quarter.
Although profits continued to grow by more than expected, only 52% of companies beat their sales expectations. That indicates waning demand for some businesses.
Note: Some businesses. Not all.
So let’s go where the growth is by zeroing in on companies whose demand is accelerating. That’s where we’ll find the most profit potential.
Last week, I promised to serve up an opportunity for you. Now, it’s time to deliver…
The Ground Rules for Your Next Tech Stock Purchase
In my article last week, I noted two criteria that all potential tech investments must meet…
- The company must be a “triple play.” That is, it must have just reported results that beat earnings expectations, beat revenue expectations and raised future guidance. In other words, one of the most fundamentally solid companies around.
- The company needs to have considerable takeover appeal. With blue-chip tech companies boasting near-record cash balances, coupled with waning organic growth in the sector, it’s only natural for them to go on an acquisition spree. That’s why it makes sense for us to scoop up prime takeover targets before the big boys do.
In the end, there are a handful of contenders. But one has emerged as the top choice – Synaptics (SYNA). Here’s why…
Touch the Growth
Founded in 1986, Synaptics develops “touch” technologies for navigation, cursor control and multimedia controls on a range of electronic devices.
In fact, over one billion devices – from PCs to laptops and desktops to smartphones – now include one of Synaptics’ touch technologies. All of which are protected by almost 300 U.S. patents and patent applications.
Now remember… we’ve been here before.
And we recently got confirmation that Synaptics and Uni-Pixel are working together, proving that both are on the cutting edge of this growth opportunity.
We saw Synaptics’ technology first-hand back in January, when we talked to the company’s Product Marketing Manager, Chao-Tung Lin, at the Consumer Electronics Show in Las Vegas. Check out the interview here.
Of course, the hard data confirms Synaptics’ status as an industry leader, too…
Busting Trends and Setting Records
On April 25, Synaptics reported quarterly results that bucked the overall tech sector trend.
In fact, the company notched a record quarter, with overall sales up 24%.
In the mobile segment – which accounts for the majority of Synaptics’ business – sales soared by 57%.
And on the back of a 240-basis-point improvement in gross margins, the company’s earnings per share jumped by 55%.
As Rick Bergman, President and CEO, said, “The continued adoption of our solutions by a broad base of key customers is a testament to the strength of our technology leadership and has enabled us to diversify our business through increased penetration of the rapidly growing mobile touchscreen market.”
That’s why management expects even better times ahead. Bergman says, “We believe Synaptics is well-positioned to drive long-term, profitable growth.”
Specifically, the company forecasts the sales growth rate to climb as high as 49% in the next quarter. That would double the growth rate of the previous quarter.
Rounding out the investment case is a rock-solid balance sheet, with $315.5 million in cash and a mere $2.3 million in debt.
Synaptics currently trades with a market capitalization of about $1.5 billion – roughly 13 times its forward earnings. And that’s after rallying by almost 15% since its earnings report.
Looking ahead, Synaptics is a no-brainer acquisition for any of the cash-heavy customers that it currently serves, including Samsung.
Especially given the rapid growth, increasing profitability, patent-protected technology and attractive valuation.
Bottom line: If you want to stack the odds heavily in your favor in the technology sector, Synaptics represents one of the best bets. So don’t miss out.
Ahead of the tape,