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Five tech stocks for 2002
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December 31, 2001: 8:54 a.m. ET
Think the tech sector will bounce back? Here are five stocks to keep in mind.
By Staff Writer Paul R. La Monica
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NEW YORK (CNN/Money) - The Nasdaq Composite is set to suffer its second consecutive losing year, unless it jumps more than 26 percent by Dec. 31. Needless to say, that's not going to happen.
Still, fans of the technology sector can take solace in the fact that the Nasdaq has never declined three years in a row. Now, of course, pessimists may say that rules are meant to be broken, but considering that many economists expect the recession to be a brief one, there's a good chance earnings growth for struggling technology companies will pick up in the latter half of 2002.
With that in mind, we ran a screen to try and find some technology companies that are expected to post especially strong results in the next fiscal year. We looked for profitable companies that have long-term estimated earnings growth rates that are higher than their competitors', yet trade at a discount to them based on the price-to-earnings growth (PEG) ratio. Five companies popped up with especially strong growth rates that looked intriguing.
Only the beginning for Genesis?
Genesis Microchip, which makes chips that manipulate and process digital images, hasn't exactly suffered in 2001. The company, a leading provider of chips for liquid crystal display (LCD) screens, such as flat-panel computer monitors, reported a 106 percent year-to-year revenue increase for the first six months of its latest fiscal year to September. What's more, earnings increased by 133 percent.
Stronger-than-expected sales of personal computers this holiday season seem to be helping Genesis (GNSS: down $1.46 to $67.10, Research, Estimates) in its latest quarter as well. The company announced in early December that revenue for its fiscal third quarter (which ends in December) will be greater than analysts initially expected. Wall Street, however, has picked up on the Genesis story. The stock has had an amazing run this year, surging nearly 600 percent. That obviously should make investors a little wary. But fortunately, Genesis is not trading at a completely ridiculous earnings multiple. At 42.7 times 2002 earnings estimates, Genesis appears reasonably valued, given that earnings are expected to increase by 44 percent next year and at a 30 percent clip annually over the next three to five years.
Intersil Banks on Wireless
If surfing the Web on your laptop from anywhere appeals to you, then you'd realize why earnings for chip set maker Intersil are expected to soar over the next few years. Intersil (ISIL: down $0.51 to $33.70, Research, Estimates) makes chips for networking gear using a wireless technology platform known as 802.11b. This short-range wireless technology allows devices to access a local area network (LAN) from up to 300 feet away without having to be connected by a cable.
Intersil's chip sets are used in wireless networks set up at Starbucks as well as several airports. The company also scored a major coup in October when Intel announced it would use Intersil's Prism 2.5 chip sets in its wireless LAN products. Earnings for Intersil are expected to increase by 58.3 percent next year and at an average annual rate of 26.5 percent over the long term. This hasn't gone unnoticed. Shares of Intersil have gained more than 40 percent this year. And at 57.7 times next year's earnings estimates, the stock is the most expensive of the five we've highlighted on a PEG ratio basis, trading at 2.2 times its growth rate.
Going on the defensive
One of the consequences of the Sept. 11 terrorist attacks was a run up in the stocks of defense contractors as investors assumed that the government would increase military spending over the next few years. Some technology companies also may benefit from this trend. Microsemi, a manufacturer of analog and mixed signal power management chips (i.e. chips that can help prolong a device's battery life), is one such technology company. Although Microsemi (MSCC: up $0.18 to $30.16, Research, Estimates) does not have government customers per se, approximately 27 percent of its sales are to customers who then sell their products to the government, companies like Boeing and Raytheon for example.
Analysts are predicting a 21.5 percent increase in earnings for the current fiscal year (ending in September 2002) and a 41.8 percent jump in earnings for Microsemi's next fiscal year. Over the long-haul, analysts expect earnings to increase at a rate of 25 percent annually. Even though the stock increased 118 percent so far in 2001, it is the cheapest of the five we've profiled, trading at just 27.5 times next year's earnings estimates, or only 1.1 times its long-term growth rate.
Saving (battery) lives
O2Micro is another designer of power management chips. But its focus is more on the average consumer and not the government. O2Micro (OIIM: down $0.34 to $23.26, Research, Estimates) develops products such as battery charger chips and the AudioDJ chip for laptop computers and other portable electronic devices. The AudioDJ chip allows a user to play a CD on a laptop while the computer is turned off. Dell, Hitachi and Sony all are customers of O2Micro.
You can't ask for much higher growth than what is expected for O2Micro next year. Analysts are predicting a 128.6 percent jump in earnings on a 55 percent increase in revenues. Investors have caught on to this, sending the stock up nearly 200 percent in 2001. As a result, the stock is the most expensive of the five we're looking at on an absolute price-to-earnings basis, at 70.3 times 2002 earnings estimates. But since analysts are estimating that earnings will grow at a rate of 41.5 percent annually over the next three to five years, the valuation isn't totally exorbitant. O2Micro is trading at 1.7 times its long-term growth rate.
A logical storage investment
Our final technology stock pick differs drastically from the others. It's the only stock on our list that has not enjoyed a strong year. Shares of QLogic (QLGC: down $0.36 to $46.74, Research, Estimates), which makes host bus adapters for storage devices, have plunged more than 40 percent in 2001. Data storage firms across the board were hit hard in 2001 as corporate customers cut back their budgets for storage products. Nonetheless, storage remains an important area as the increased usage of the Internet makes the need to store data in an efficient manner paramount.
Earnings for QLogic are expected to bounce back modestly in its next fiscal year. Analysts are predicting 19.8 percent earnings growth. But over the long term, earnings should increase at a rate of 30 percent annually. The stock is not exactly cheap, trading at 47 times next year's earnings estimates. But it is a bargain when you compare it with other storage companies. QLogic is trading at just 1.6 times its long-term growth rate, while competitor Emulex (EMLX: down $1.93 to $40.48, Research, Estimates) is trading at 2.4 times its long-term growth rate. What's more, another competitor JNI (JNIC: down $0.06 to $8.56, Research, Estimates), isn't even expected to post a profit in 2002. 
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