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Tech's triple-digit club
Should investors stick with hot tech stocks that are up more than 100 percent this year?
October 4, 2004: 1:05 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Barring a surge of almost unprecedented proportions during the final three months of the year, the Nasdaq is not going to match last year's heady 50 percent gain.

For the year through Oct. 1, the Nasdaq was down 3 percent.

But there have been some techs that have bucked the gloomy trend. They include Autodesk, PalmOne, Taser and Travelzoo, which have all more than doubled during the first nine months of the year.

Should investors stick with these hot momentum plays?

It depends. Taser and other so-called homeland security tech plays like IPIX and Magal Security Systems appear to have run up more on hype and speculation. Ditto for Travelzoo, an online travel search company.

But some of this year's winners still look attractive. The key is finding the ones that have surged because of strong fundamentals.

"You've had a narrow group of tech companies that have been delivering positive and accelerating growth characteristics and money tends to get concentrated in those few companies that are doing that," said Arnie Berman, global capital markets strategist with CreditSights.

All about earnings

Autodesk, JupiterMedia, Novatel Wireless, PalmOne, Research in Motion and Shanda Interactive would appear to fit this category. All six stocks have more than doubled this year...but analysts have raised their earnings estimates for this year and next year for these companies during the past three months.

Lucky seven?
These tech stocks have surged this year but may have more room to run due to their strong growth potential.
CompanyYTD price changeEPS Est. Change*2005 P/ELT EPS Gr. Rate
Novatel Wireless305.8%2.7%32.450%
Research in Motion120.9%3.7%40.320%
Shanda Interactive100.8%24.7%21.635%
* revisions for next year during past three months

Ori Shachar, an analyst with Driehaus Capital Management, an institutional firm focused on growth stock investing, said that his firm owns shares of JupiterMedia, Novatel Wireless and Shanda Interactive and still likes all three stocks.

JupiterMedia owns an Internet research business as well as online photo imaging libraries and Novatel Wireless makes wireless data modem cards used in laptops. Shanda Interactive is a leading developer of online games in China.

Shachar said one common thread with these stocks is that they are niche companies. So he thinks that they won't be faced with many of the same concerns about aggressive pricing...which tends to hurt earnings for companies in markets with a lot of players.

"A recurring theme in tech has been competition. Most areas of tech are very crowded and that puts a lot of pressure on margins," Shachar said.

Of course, valuation is going to be a big concern for companies that have enjoyed huge run-ups. But Shachar said he's willing to hold on to winning stocks, regardless of valuations, as long as there is no reason to suspect that earnings growth is going to slow.

More about hot tech stocks
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With that in mind, Todd Campbell, president of E.B. Capital Markets, an independent research firm catering to institutional investors, said that the companies that are still seeing positive revisions should continue to fare better than other techs that may seem to be more attractive.

Intel, for example, may appear relatively "cheap" at 18 times 2005 earnings estimates. But analysts have lowered their earnings targets for the company over the past three months.

"If you are interested in buying growth companies, then why would you buy something where estimates are declining? You need to look at tech companies that are guiding higher," Campbell said. "There is a tug of war between downgrades and upgrades on earnings and that's what is separating the winners from losers in tech."

As such, Campbell said he likes Research in Motion and InfoSpace, another tech that has doubled this year. Analysts have raised next year's earnings estimates for InfoSpace slightly during the past three months.

Tech stocks

Three other winning tech stocks that he likes for similar reasons are Adobe Systems, Cognizant Technology Solutions and Qualcomm. These three stocks are up 28 percent, 32 percent and 50 percent, respectively this year.

Still, investors have to be careful when chasing winners. Momentum can be a fickle thing. For this reason, Berman thinks beaten down software and semiconductor stocks might perform better than this year's hot techs in the fourth quarter since expectations are so much lower. So even the slightest upside surprise could lift some of these stocks.

"At this point, boring makes for an interesting fourth quarter. I think this year's losers win. The stuff that people chucked from their portfolios is what they will want back," said Berman.  Top of page

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